Edited version of private advice

Authorisation Number: 1012641525640

Ruling

Subject: Employment termination payment - genuine redundancy

Question

Is any part of an amount received on the termination of employment a tax-free part of a genuine redundancy payment under section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period

Income year ended 30 June 2013

The scheme commenced on

During the income year ended 30 June 2012

Relevant facts and circumstances

Your Client commenced employment with the Employer sometime in the 20XX income year.

A letter to terminate employment (the Termination Letter) was sent in the 20YY ncome year by the director of the Employer to your Client. The Termination Letter details the reasons for the termination as follows:

As you are aware, the unprecedented economic climate and business conditions for [the Employer] have been very difficult during the past 12 months. Over this time our business has lost considerable revenue and [the Employer] are not able to sustain this loss.

Following consultation with you yesterday, it has been concluded that the current staffing arrangements are unsustainable in the medium term future.

It is due to this that the director now finds himself being required to complete the roles and responsibilities which you currently perform.

Your Client was provided with two weeks' notice, commencing sometime in the 20YY income year. During that period, your Client was placed on 'special leave'. This means that for all intents and purposes, your Client was viewed as an employee but there was no need for them to attend the premises.

A letter with the final payment details (the Final Payment Letter) was sent by the director to your Client. Your Client received amounts for salary, annual leave, superannuation and commission from the termination.

A clause of the Employment Agreement (the Agreement) signed between your Client and the Employer provides the remuneration of your Client as follows:

_ The employer shall pay to the Employee an annual wage at the rate specified in [Item number] of [Schedule number] of this Agreement.

_ The wage of the employee will:

n Accrue from day to day;

n Be payable in weekly instalments in arrears; and

n Be paid net after tax, any payments for tax, superannuation or other Governmental levies will be paid directly by the Employer

_ The Employer shall pay to the Employee a Bonus in the amount and at the time specified in [item number] of [Schedule number] to the Agreement. The Employees entitlement to the bonus is conditional upon the Employee completing twelve months service in accordance with this Agreement and reaching the targets set in the Employees individual Key Performance Indicator.

…

Another clause of the Agreement provides the superannuation entitlements of your Client as follows:

The Employee shall nominate, and the Employer shall make contributions with respect to the superannuation scheme in respect to the Employee in the amount required under the Superannuation Guarantee (Administration) Act 1992 and any regulations made pursuant thereto.

A different clause of the Agreement provides the leave entitlements of your Client as follows:

The Employee is entitled to annual leave in accordance with provisions of the Fair Work Act 2009.

Relevant to this case, a Schedule of the Agreement provides the following:

Your Client received an amount in their 20YY income year PAYG Payment Summary. No payments were listed in the section 'Lump Sum D' for genuine redundancy payments.

Your Client contends that the payment was made with the intention that it would be a genuine redundancy payment.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Paragraph 82-130(a).

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

Income Tax Assessment Act 1997 Section 83-135.

Income Tax Assessment Act 1997 Paragraph 83-135(a).

Income Tax Assessment Act 1997 Paragraph 83-135(c).

Income Tax Assessment Act 1997 Paragraph 83-135(d).

Income Tax Assessment Act 1997 Section 955-1.

Reasons for decision

Summary

The amounts received by your Client are not a genuine redundancy payment as they are not in excess of the amount that your Client would have received had they terminated their employment voluntarily. Therefore, no part of the payment is tax-free.

Detailed reasoning

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 of the ITAA 1997.

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

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 that 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:

_ a superannuation benefit;

_ a 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.

To determine if a payment constitutes an employment termination payment, all the conditions in section 82-130 of the ITAA 1997 must be satisfied.

Failure to satisfy any of the conditions under subsection 82-130(1) of the ITAA 1997 will result in the payment not being considered an employment termination payment. Furthermore, any termination payments received outside of the 12 months will be taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12 month rule.

Paid as a consequence of the termination of your employment

For a payment to be treated as an employment termination payment, the first condition that needs to be met is that there must be a payment that is made in consequence of the termination of employment of the taxpayer (see subparagraph 82-130(1)(a)(i) of the ITAA 1997).

In the present case, several amounts were made prior to and subsequent to the termination of employment which took effect at the expiration of the two weeks' notice given in the 20YY income year.

Firstly there were two payments that have been described in the Final Payment Letter as salary. As these payments were made prior to the termination of employment they are not considered to be 'in consequence of' the termination of your Client's employment.

Next are the payments in respect of annual leave and superannuation. As noted above, section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments. Payments that are covered under section 82-135 include:

_ a superannuation benefit (paragraph 82-135(a));

_ a payment for unused annual leave (paragraph 82-135(c)); and

_ a payment for unused long service leave (paragraph 82-135(d)).

The assessability of superannuation benefits are covered by Divisions 301 to 305 of the ITAA 1997. Similarly, the assessability of payments for unused annual leave are dealt with by Subdivision 83A. Consequently, these payments, whilst paid in consequence of the termination of your Client's employment are not employment termination payments.

Finally, there are the two amounts paid and described as commission.

As these amounts apparently represent unpaid commission owing at the time of the termination of your employment they would not be 'in consequence of' the termination of your Client's employment. In other words, these amounts would have been paid to your Client regardless of the termination of employment.

Consequently, the amounts described as commission are not employment termination payments.

In light of the foregoing, it is clear that none of the payments referred to in the Final Payment Letter represent an employment termination payment. Therefore, it is not necessary to examine whether any part of these payments represent the tax-free part of a genuine redundancy payment.