Edited version of your private ruling

Authorisation Number: 1012599453895

Ruling

Subject: Genuine redundancy payment

Questions

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

2. Will the 'years of service' for the purposes of the tax-free part of a genuine redundancy payment incorporate your entire service period within the corporate group, including employment in both Australia and abroad?

Answers

1. No.

2. Yes.

This ruling applies for the following period:

Year ended 30 June 2014.

The scheme commenced on:

1 July 2013.

Relevant facts and circumstances

You are over 50 years of age.

You commenced employment with a corporate group (the Corporate Group), trading as a foreign company (the Foreign Company), during the 2005-06 income year. During your employment you were based overseas. This employment was terminated during the 2011-12 income year.

The day following the above mentioned termination date you commenced employment with an Australian company (the Australian Company) which is part of the Corporate Group.

All vacation and other accrued entitlements from the Foreign Company were paid out upon termination with the Foreign Company; however, you received a credit for your past service with the Foreign Company in calculating vacation and other entitlements for the purposes of your employment with the Australian Company.

Following a restructure within the group, your role was no longer required as your duties and responsibilities were being relocated to an existing role based overseas.

As such, your position was made redundant during the 2013-14 income year.

In the Deed of Release, it advised of your entitlement to the following amounts:

The payment of the above amounts will be made during the 2013-14 income year.

In a letter dated during the 2013-14 income year, the Australian Company has made the following statement with regards to your continuous service within the Corporate Group:

As part of your subsequent employment with the Australian Company, your continuous service with the Corporate Group was recognised for the purpose of calculating your service related entitlements, including annual and long service leave.

With regards to the payment in lieu of notice, you have stated that had you voluntarily resigned the company could either:

• Make you work the notice period; or

• Release you with immediate effect and then pay out the notice period to you.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 80-50

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Subsection 82-130(1)

Income Tax Assessment Act 1997 Subparagraph 82-130(a)(i)

Income Tax Assessment Act 1997 Section 82-135

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

Income Tax Assessment Act 1997 Section 83-175

Income Tax Assessment Act 1997 Paragraph 83-170

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary

The 'years of service' for the purposes of the tax-free part of a genuine redundancy payment is eight years.

The sum of the redundancy payment (B + C) is a genuine redundancy payment. Of this amount, X is non-assessable non-exempt income as it represents the tax-free part of a genuine redundancy payment.

The amount of your genuine redundancy payment in excess of your tax-free amount, being Y, together with your payment in lieu of notice of D will be taxed as an employment termination payment.

Detailed reasoning

Genuine redundancy payment

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 employees 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)).

Provided at the time of your dismissal there was no arrangement in place to reemploy you following your dismissal, the redundancy payment (B + C) will satisfy the requirements under section 83-175 of the ITAA 1997 and will therefore treated as a genuine redundancy payment.

However, the facts state that had you voluntarily resigned you would still have been entitled to the payment in lieu of notice if the employer chose to release you with immediate effect. As such, the payment in lieu of notice of does not satisfy the requirements in subsection 83-175(1) of the ITAA 1997 and therefore is not a genuine redundancy payment. Instead, the payment in lieu of notice represents an employment termination payment (ETP). ETPs will be discussed in due course.

Tax-free amount of a genuine redundancy payment

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) is non-assessable non-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)

For the 2013-14 income year:

Base amount is $9,246;

Service amount is $4,624; and

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

For the purposes of a genuine redundancy payment, the 'years of service' is the number of years recognised by the employer when making the payment.

There is no evidence to indicate exactly how the amount of your redundancy payment was calculated. However, as your employer has stated that your continuous service with the Corporate Group, which includes your employment in both Australia and overseas, was recognised for the purpose of calculating your service related entitlements, it is consistent to apply the same service period as the 'years of service'.

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

Therefore provided payment of your entitlements is made before the end of the 2013-14 income year, your tax-free amount under subsection 83-175(3) of the ITAA 1997 is:

$9,246 + ($4,624 x 8) = $46,238

As such, $46,238 of your total redundancy payment of is non-assessable non-exempt income under subsection 83-170(2) of the ITAA 1997.

As stated previously, any amount in excess of the tax-free amount is an employment termination payment which is discussed below.

Employment termination payment

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

employment termination payment has the meaning given by section 82-130.

Subsection 82-130(1) of the ITAA 1997 declares:

A payment is an employment termination payment if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

(ii) after another person's death, in consequence of the termination of the other person's employment; and

(b) it is received no later than 12 months after the termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

• payment for unused annual leave or unused long service leave;

• the tax-free part of a genuine redundancy payment or an early retirement scheme payment; and

• reasonable capital payments for personal injury.

The amount of your genuine redundancy payment in excess of your tax-free amount is Y. This, together with your payment in lieu of notice, will be taxed as an employment termination payment (ETP).

Taxation treatment of unused annual leave and unused long service payments

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, if the payment of unused annual leave is made in connection with a genuine redundancy payment, section 83-15 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%.

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

Refund of tax withheld

If your employer has withheld the incorrect amount of tax from your termination entitlements, it can be rectified when you lodge your tax return for the 2013-14 income year. As you do not include the non-assessable non-exempt income in your tax return, any excess of tax withheld for the income year will be credited to you once the tax return is processed.