Edited version of your private ruling

Authorisation Number: 1012583534949

Ruling

Subject: Employment termination payment - genuine redundancy

Question 1

Is any part of the payment received on termination of employment a tax-free part of a genuine redundancy payment?

Answer

No.

Question 2

Will the 'whole of income' cap of $180,000 apply to the employment termination payment?

Answer

Yes.

This ruling applies for the following periods:

The year ending 30 June 2013.

The scheme commences on:

1 July 2012.

Relevant facts and circumstances

Your client received an offer of employment from an employer to work in a specified role in a project.

Your client's employment commenced in the relevant financial year and they were required to work in accordance with a specific roster.

It was stated in your client's offer of employment what their scope of work on the project would be. It was also noted that as there are different work requirements across their scope of work, manning levels will fluctuate from time to time and your clients employment may terminate.

You advised that your client was employed by their employer to work only on the specified project.

You advised that your client was aware that they were not going to be deployed elsewhere on completion of the project.

Your client's employment with the employer ceased during the relevant financial year.

You advised when the employer finished the scope of work on the project.

You provided a copy of your client's PAYG payment summary - employment termination payment summary for the year ended 30 June 2013.

Your client's salary and wages, in addition to the employment termination payment they received was greater than the sum of $180,000.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27F.

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Section 83-10.

Income Tax Assessment Act 1997 Section 83-85.

Income Tax Assessment Act 1997 Section 83-175.

Income Tax Assessment Act 1997 Subsection 83-175(1)

Income Tax Assessment Act 1997 Subsection 83-175(2)

Income Tax Assessment Act 1997 Subsection 83-175(3)

Income Tax Assessment Act 1997 Subsection 83-175(4)

Reasons for decision

Summary

No part of the employment termination payment is a genuine redundancy payment. This is because your client was employed under a fixed period of employment specified under subparagraph 83-175(2)(a)(ii) of the ITAA 1997.

The whole of income cap will apply to the employment termination payment received by your client as their total salary from their employer for the relevant income year is greater than $180,000. This means the ETP will be taxed at the highest marginal rate.

Detailed reasoning

Genuine redundancy payment

A payment made to an employee is a genuine redundancy payment if it satisfies all the criteria set out in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997).

For a payment to be a genuine redundancy payment it must satisfy paragraph 83-175(2)(a) of the ITAA 1997 which states:

(a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach the age or complete the period of service (as the case may be);

The Commissioner has issued Taxation Ruling TR 2009/2 (TR 2009/2), titled Income Tax: genuine redundancy payments, which provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

Paragraphs 36 and 38 of TR 2009/2 states:

36. Under subparagraph 83-175(2)(a)(ii), a payment made at the end of a fixed period of employment cannot normally be a genuine redundancy payment.
…

38. In some cases, particularly those involving multi-disciplinary project-based work, an employee's period of service may be determined by reference to the achievement of a particular outcome rather than a specified period of time. The employee's period of service in these circumstances concludes on the achievement of that outcome.

In relation to project based work TR 2009/2 provides an example at paragraphs 148 to 154, which states:

148. Buildcorp makes contributions to an industry trust on behalf of its workers to cover the company for future termination payments (other than unused annual leave payments) it might be required to make under industry awards. The workers are all employed on a daily hire basis.

149. Buildcorp has a major construction contract to build an office block. Buildcorp's employees, its subcontractors and their employees have all been advised that they can expect to be employed on the project for at least six months, depending on their trade or other qualifications.
...

152. ... if the workers had all completed their allotted tasks in keeping with the mutual intentions of the parties, any payments accruing on their termination of employment would not be eligible to be genuine redundancy payments. In these circumstances, the employees are terminated at the expiry of a fixed period of employment.

In this case, your client received an offer of employment from their employer to work in a specified position on a particular project.

It was clear from your client's offer of employment that their position was tied exclusively to a particular scope of work on the project and their employment would expire on the completion of this component of the project. This was specifically stated in the job offer issued to them by the employer.

On completion and fulfilment of your client's employer's contractual obligations for the project, your client's employment was terminated during the relevant financial year.

In this case, your client's payment is a payment made at the end of a fixed period of employment as specified under subparagraph 83-175(2)(a)(ii) of the ITAA 1997. Therefore, no part of the payment is a genuine redundancy payment in accordance with section 83-175 of the ITAA 1997.

Taxation of employment termination payments

An employment termination payment is comprised of the following components:

· Tax free component this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and

· Taxable component the amount remaining after deducting the tax free component from the total payment.

The tax free component is not assessable income and is not exempt income. The taxable component is included, in full, as assessable income.

The taxable component is subject to tax, depending on the person's age when the payment is received. The rates of tax are as follows:

* Preservation age is the age at which retirees can access their superannuation benefits. This will be 55 for persons born before 1 July 1960 and between 55 and 60 for persons born after 30 June 1960.

The preservation age is the age at which retirees can access their superannuation benefits. This will be 55 for persons born before 1 July 1960.

'Whole of income' cap of $180,000

In the 2012 May Federal Budget, a whole of income cap of $180,000 was introduced for employment termination payments. Accordingly, from 1 July 2012, the abovementioned concessional tax rates on employment termination payments will only apply to that part of the payment that takes a person's taxable income (including the taxable portion of the payment) to $180,000. Amounts above this $180,000 whole of income cap will be taxed at the highest marginal tax rate of 46.5%, including Medicare levy.

The Employment Termination Payment (ETP) cap works in conjunction with the whole of income cap. This ensures that ETPs will only attract concessional tax rates up to the ETP cap amount. For the 2012-13 income year, the ETP cap is $175,000.

The whole of income cap does not apply to ETPs relating to a genuine redundancy, invalidity, death or compensation due to an employment related dispute. Please note that if an ETP would have been received anyway as a result of voluntarily terminating employment, then it falls under the new measure and the 'whole of income' cap will be applied.

Based on the information provided, your client's salary from their employer for the 2012-13 income year is greater than $180,000. As such, the employment termination payment will be in excess of the whole of income cap of $180,000.