Edited version of your private ruling

Authorisation Number: 1012596577714

Ruling

Subject: Genuine redundancy - payment in lieu of notice

Questions

1. Is any part of the redundancy payment and the payment in lieu of notice the tax-free part of a genuine redundancy payment?

2. Are the payments for unused annual leave and leave loading subject to a tax-offset due to being made on redundancy?

3. Are the payments for unused long service leave subject to a tax-offset due to being made on redundancy?

Answers

1. Yes.

2. Yes.

3. Yes.

This ruling applies for the following periods:

Income year ending 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You are below 65 years of age in the 2012-13 income year.

1. You commenced employment with the Employer on during the 1999-00 income year.

2. The Employer subsequently went into liquidation and the Liquidator was appointed as the liquidator.

3. As a result of the liquidation, your employment was terminated during the 2012-13 year.

4. You were terminated before you reached 65 years of age.

5. The Liquidator advised you that pursuant to the General Employee Entitlements and Redundancy Scheme (GEERS) you are eligible for a gross payment of A and tax of B was withheld on this payment.

6. Your contract does not indicate that you would have been entitled to the payment in lieu of notice had you voluntarily resigned.

7. None of the payments received were for payment in lieu of superannuation.

8. At the time of dismissal there was no arrangement between you and the Employer or between the Employer and another person, to employ you after the dismissal.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Subsection 82-130(4).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Paragraph 82-135(c).

Income Tax Assessment Act 1997 Paragraph 82-135(d).

Income Tax Assessment Act 1997 Paragraph 82-135(e).

Income Tax Assessment Act 1997 Section 83-10.

Income Tax Assessment Act 1997 Section 83-15.

Income Tax Assessment Act 1997 Section 83-80.

Income Tax Assessment Act 1997 Section 83-85.

Income Tax Assessment Act 1997 Section 83-170.

Income Tax Assessment Act 1997 Subsection 83-170(2).

Income Tax Assessment Act 1997 Subsection 83-170(3).

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

The sum of the payment in lieu of notice and the redundancy payment is a genuine redundancy payment. As this amount is less than your tax-free amount, in respect of the genuine redundancy of this employment, it is not assessable income and is not exempt income.

Your unused annual leave, leave loading and unused long service payments were paid in connection with a genuine redundancy payment. You are therefore entitled to tax offsets to ensure the rate of tax on those payments does not exceed 30%.

Detailed reasoning

Genuine redundancy

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

(1)     A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee's position is genuinely redundant and exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of dismissal.

(2)     A genuine redundancy payment must satisfy the following conditions:

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

(i) the day he or she turned 65;

(ii) if the employees 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);

(b) if the dismissal was not at arm's length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's length;

(c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after dismissal.

(3)     However, a genuine redundancy payment does not include any part of a payment that was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later time.

Payments not covered

(4)     A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

2. Subsection 82-135 of the ITAA 1997 includes (among others):

_ superannuation benefits;

_ the payment of a pension or annuity; and

_ unused annual leave (paragraph 82-135(c)) or long service leave payments (paragraph 82-135(d)).

3. As such, the payments you received for unused annual leave and leave loading, and unused long service leave are not genuine redundancy payments pursuant to subsection 82-135(4) of the ITAA 1997. The taxation treatment of these payments will be addressed in due course.

4. The redundancy payment and the payment in lieu of notice will be addressed below.

5. In a letter you were advised that you were entitled to a redundancy payment for the amount of C gross and a payment in lieu of notice of D gross.

6. When the Employer ceased trading and was placed into liquidation your position within the firm effectively no longer existed, and your employment was terminated. As such, we can deduce that your employment was terminated because your position was made genuinely redundant. Further, your contract did not state either a redundancy or a payment in lieu of notice would have been made to you had you voluntarily resigned. As such, subsection 83-175(1) of the ITAA 1997 has been satisfied.

7. The three conditions pertaining to subsection 83-175(2) of the ITAA 1997 have been satisfied as:

• You were dismissed before you reached 65 years of age;

• The dismissal was made at arm's length; and

• At the time of dismissal, there was no arrangement between yourself and the employer, or between the employer and another person, to employ you after the dismissal.

8. A further requirement, as set out in subsection 83-175(3) of the ITAA 1997, requires that no part of the payment was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later date. As none of the payments received were for payment in lieu of superannuation, this requirement is satisfied.

9. Lastly, the redundancy payment and payment in lieu of notice are not excluded from the definition of a GRP. As such, subsection 83-175(4) of the ITAA 1997 has been satisfied.

10. As all the conditions under section 83-175 of the ITAA 1997 have been satisfied, it is accepted that the redundancy payment and payment in lieu of notice totalling E is a genuine redundancy payment.

Tax-free amount

11. Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) of the ITAA 1997 is not assessable income and is not exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment. The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

12. For the 2012-13 income year:

Base amount means $8,806;

Service amount means $4,404; and

Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates.

13. The 'years of service' to which the genuine redundancy payment relates is thirteen whole years of service.

14. Accordingly, the tax-free part of a genuine redundancy payment you can receive in the 2012-13 income year under subsection 83-175(3) of the ITAA 1997 is:

$8,806 + ($4,404 × 13) = $66,058

15. As the payment of E is below the tax-free amount of a genuine redundancy payment, the entire amount of the payment is the tax-free part of a genuine redundancy payment. This tax-free amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997.

16. Consequently the amount of E is not required to be included in your income tax return for the 2012-13 income year.

Taxation treatment of unused annual leave and unused long service payments

17. Unused annual leave would ordinarily be included in assessable income under section 83-10 of the ITAA 1997 and subject to marginal rates of tax. However, as this payment was made in connection with a genuine redundancy payment, section 83-15 of the ITAA 1997 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%.

18. Similarly, unused long service leave would ordinarily be included in assessable income under section 83-80 of the ITAA 1997. However, as this payment was made in connection to a genuine redundancy payment, section 83-85 of the ITAA 1997 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%.