Edited version of your written advice

Authorisation Number: 1012752361636

Ruling

Subject: Genuine redundancy payment

Questions

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

2. Is the payment for unused annual leave subject to a tax-offset due to its connection to a genuine redundancy payment?

Answers

1. Yes

2. Yes

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You are under 65 years of age.

Some time ago, you commenced employment with the Employer.

The Employer subsequently went into liquidation and a liquidator was appointed

As a result of the liquidation, your employment was terminated.

During the 2013-14 income year, the liquidator advised you a government body had made a determination in respect of your pre-appointment entitlements. On the same day, you received a payment for your entitlements.

The payment you received comprised of three components:

• unpaid wages

• unused annual leave

• payment in lieu of notice.

You provided a copy of your employment contract. The contract indicates you would not have been entitled to a payment in lieu of notice if you had voluntarily resigned.

There was no date prior to your 65th birthday when you would be required to cease employment.

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

You provided all relevant correspondence between yourself and the Employer in relation to the termination of your employment. 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 subsection 6-5(2)

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 subsection 83-10(2)

Income Tax Assessment Act 1997 section 83-15

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

The payment for your unused annual leave was made in connection with a genuine redundancy payment. You are therefore entitled to a tax offset to ensure the rate of tax on the payment does not exceed 30% plus Medicare levy (if applicable)

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 payments):

• 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)).

Unpaid wages

In view of the above, the payment you received for unpaid wages is not a GRP under subsection 83-175(1) of the ITAA 1997.

The payment you received for unpaid wages is assessable under subsection 6-5(2) of the ITAA 1997, which provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the year. Salary and wages, including annual leave payments, is considered ordinary income as it is paid directly as a result of the personal services an employee renders for their employer.

Unused annual leave

The payment you received for unused annual leave is not a GRP in view of subsection 82-175(4) of the ITAA 1997. The taxation treatment of this payment is governed by sections 83-10 and 83-15 of the ITAA 1997 and will be addressed later.

Payment in lieu of notice

The payment in lieu of notice is addressed below.

As noted in the facts, your employment was terminated due to the Employer going into liquidation and the appointment of a liquidator. As your position effectively ceased to exist, it is accepted that your employment was terminated because your position was made genuinely redundant. Further, your employment contract specifically stated that no payment in lieu of notice would have been made to you if the termination had been voluntary. As such, 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:

• The taxpayer was dismissed before they reached 65 years of age;

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

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

Furthermore, the requirement set out in subsection 83-175(3) of the ITAA 1997 is satisfied as the payment does not include any part of a payment that was received in lieu of superannuation benefits.

Lastly, the payment in lieu of notice is not excluded from the definition of a GRP by section 82-135 of the ITAA 1997. As such, subsection 83-175(4) of the ITAA 1997 has been satisfied.

As all the conditions under section 83-175 of the ITAA 1997 have been satisfied, it is accepted that the payment in lieu of notice is a GRP.

Taxation treatment 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) 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)

For the 2013-14 income year:

Base amount means $9,246;

Service amount means $4,624; and

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

It should be noted that years of service refers to each whole year of completed employment service to which the redundancy payment relates; 6 months, 8 months or even 11 months do not count as a whole year for the purpose of this calculation.

Accordingly, the tax-free part of a GRP a taxpayer can receive in the 2013-14 income year under subsection 83-175(3) of the ITAA 1997 is:

$9,246 + ($4,624 × whole years of service)

As the payment in lieu of notice is below the tax-free amount of a GRP, the entire amount of the payment is the tax-free part of a GRP. This tax-free amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997.

Consequently the payment in lieu of notice is not required to be included in your income tax return for the 2013-14 income year.

Taxation treatment of an unused annual leave payment

The unused annual leave payment is assessable income under subsection 83-10(2) of the ITAA 1997 and ordinarily subject to marginal rates of tax.

However, according to section 83-15 of the ITAA 1997:

You are entitled to a tax offset to ensure that the rate of tax on an unused annual leave payment does not exceed 30%, to the extent that:

(a) the payment was made in connection with a payment that includes, or consists of, any of the following:

(i) a genuine redundancy payment;

(ii) an early retirement scheme payment;

(iii) the invalidity segment of an employment termination payment or superannuation benefit; or

(b) the payment was made in respect of employment before 18 August 1993.

As it has already been established that the payment was made in connection with a GRP, the unused annual leave payment that you received will be concessionally taxed at a rate not exceeding 30% plus Medicare levy (if applicable).