Edited version of your written advice

Authorisation Number: 1012738280476

Ruling

Subject: Genuine redundancy

Question

Is the early separation payment you received from your employer a genuine redundancy payment?

Answer

Yes.

This ruling applies for the following period:

Income year ending 30 June 2015

The scheme commences on:

1 July 2014.

Relevant facts and circumstances

You have reach preservation age.

You commenced employment with the Employer several years prior to the commencement of the 2014-15 income year.

The position with the Employer became redundant and as a result you were made excess. Your employment with the Employer was terminated on a date during the 2014-15 income year.

A clause within your applicable enterprise agreement discusses managing excess employees. In particular, the clause states that:

• the Employer may provide an employee who is made excess an opportunity for early separation;

• the option provides for the separation to occur within a specified period of time;

• the separation attracts an additional payment over and above any other amount paid on separation such as redundancy pay; and

• the payment is in lieu of the time normally expected to elapse for consultation and consideration purposes.

You were advised of your final entitlements and the following is a breakdown of the final amounts you received from your Employer upon termination:

Salary	A
Recreation Leave	B
Long Service Leave	C
Early Separation Payment	D
Redundancy (Payment in lieu of notice)	E
Redundancy (Severance pay)	F
Total	G

From the above, X was withheld as tax specifically in relation to the Early Separation payment (in addition to tax withheld on A, B and C).

There was no tax withheld on E or F.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130.

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 83-80.

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 early separation payment and the redundancy payments is a genuine redundancy payment. As this amount is greater than your tax-free amount, in respect of the genuine redundancy of this employment, only a portion is not assessable income and is not exempt income.

The remaining amount will be taxed as an employment termination payment at a maximum rate of 15% plus Medicare levy because you have reached preservation age.

Detailed reasoning

Genuine redundancy

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 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);

(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)).

Section 82-135 of the ITAA 1997 includes (among other items):

_ 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)).

In view of the above, the payments you received for recreational leave and unused long service leave are not genuine redundancy payments pursuant to paragraphs 82-135(c) and (d) of the ITAA 1997.

The redundancy payments and early separation payment are addressed below.

You were advised by your Employer that you were entitled to redundancy payments totalling $E + $F gross (for payment in lieu of notice and severance pay) and an early separation payment of $D gross.

When your position with the Employer became redundant, and you were made excess, your position within the organisation effectively no longer existed. Accordingly, on as you accepted the option under the enterprise agreement (the EA) for early separation, your employment was terminated.

As a result of the termination of employment you were paid the redundancy payments totalling $E + $F; payments that would not have been made to you had you voluntarily resigned.

In relation to the early separation payment, the EA shows that this payment is only paid to employees who have been made excess. As to whether this payment is made 'in consequence of' a termination of employment, one of the main components for payment to be a genuine redundancy payment, it is discussed below.

Paid as a consequence of the termination of your employment

The phrase in 'consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Taking into account the courts' decisions on the meaning of this phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are set out in Taxation Ruling TR 2003/13 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase in consequence of (TR 2003/13).

While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner.

In paragraph 5 of TR 2003/13 the Commissioner states:

… a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer. (emphasis added)

In this instance, the payment is only made after an employee has been made excess, that is, their employment has been terminated and they have been dismissed. The early separation payment is an additional payment, based on a number of weeks multiplied by your salary, which is over and above any other amount paid on separation e.g. redundancy pay. The payment is in lieu of the time that may have reasonably been expected to elapse for the purposes of the consultation and consideration periods.

If not for the termination of employment, the payment would not have been made. In particular, whilst the payment is an additional amount, based on a number of weeks multiplied by your salary, it is for in lieu of the time that may have reasonably been expected to elapse for the purposes of consultation and consideration periods you are entitled to. Had you not been made excess or had you voluntarily resigned, you would not have been entitled to the payment or the consultation and consideration periods.

It is therefore considered that there is a sufficient causal nexus between the making of the payment and the termination of employment to say that the payment was made in consequence of the termination of employment.

In view of the above, it is considered that your employment was terminated because your position was made genuinely redundant and that the redundancy payments and early separation payment were in excess of what you would have received had you voluntarily resigned. Accordingly, subsection 83-175(1) of the ITAA 1997 has been satisfied.

The three conditions pertaining to subsection 83-175(2) of the ITAA 1997 have also 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.

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.

As all the conditions under section 83-175 of the ITAA 1997 have been satisfied, it is considered that the redundancy payments and early separation payment made by the Employer represent a genuine redundancy payment.

Tax-free amount of a genuine redundancy payment

Subsection 83-170(2) of the ITAA 1997 provides that so much of the GRP 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 2014-15 income year:

Base amount is $9,514;

Service amount is $4,758; and

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

As sum total of the redundancy payments and early separation payment is greater than your tax free amount, only a portion of that total amount forms the tax-free part of a GRP. This tax-free amount is non-assessable, non-exempt income under subsection 83-170(2) of the ITAA 1997.

Consequently the tax free component is not required to be included in your income tax return for the 2014-15 income year.

The remaining amount (rounded to the nearest dollar) will be taxed as an employment termination payment (ETP).

The tax payable on the employment termination payment depends on your age when your employment was terminated.

In your case, you have reached your preservation age in the income year in which your employment was terminated. As the ETP is below the $185,000 'ETP cap amount' for the 2014-15 income year, this amount will be subject to concessional tax treatment, that is, it is taxed at a maximum rate of 15% plus Medicare levy.