Edited version of private advice

Authorisation Number: 1012624208139

Ruling

Subject: Genuine redundancy payment

Question

Will any part of the proposed payment to be made on termination of the employee's employment contract be a tax-free part of a genuine redundancy payment under section 83-170 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2014.

The scheme commenced on:

1 July 2013.

Relevant facts and circumstances

An employee (the Employee) commenced a contract with a company (the Company) during the relevant income year.

During the 2013-14 income year, the Company terminated the Employee using an 'early termination at will' clause in their contract.

Termination under this clause requires a payment equivalent to six months of the Employee's remuneration package on termination. This amounted to X.

The Employee's role was terminated as it was no longer required because their duties were reallocated to other employees.

You have stated that the role will remain vacant until it is removed from the organisational structure.

You have stated that had the Employee voluntarily resigned, they would not have been entitled to this payment.

The Employee held a previous role under a fixed term contract with the Company. This commenced during the 200Xincome year.

You have stated the Employee is below 65 years of age.

You have stated that there was no arrangement in place at termination to re-hire the Employee post termination.

Relevant legislative provisions

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.

Reasons for decision

Summary

The amount the Employee received on termination of employment is a genuine redundancy payment.

The tax-free part of a genuine redundancy payment is non-assessable, non-exempt income. Any amounts in excess of the tax-free part are taxed at 31.5% 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 arms-length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms-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)).

From the facts it is clear the payment will qualify as a genuine redundancy payment as all of the requirements have been satisfied. This is the case even though the Employee was on a fixed term contract and the termination was treated, by the Employer, as an 'early termination at will' rather than redundancy.

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. As this payment is made in relation to the termination of a specific contract, the years of service should reflect this contract only.

As stated previously, any amount in excess of the tax-free amount is taxed as an employment termination payment (ETP). Where an ETP is made in connection with genuine redundancy, the PAYG withholding rate is 31.5% as the employee is below their preservation age. Further, the payment will be considered an 'excluded' payment and therefore only the ETP cap of $180,000 will apply. As such, you will be required to use 'R' as the ETP code.

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%.