Edited version of your written advice

Authorisation Number: 1012919115992

Date of advice: 27 November 2015

Ruling

Subject: Genuine redundancy payment

Questions

1. Is any part of the severance payment made to your client a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Are payments made to your client for unused annual leave and unused long service leave eligible for tax offsets under sections 83-15 and 83-85 of the ITAA 1997 respectively?

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

During the 20XX-YY income year your client, through a written employment agreement (the Employment Agreement), commenced ongoing employment with an Employer in an X class position.

In the Employment Agreement it shows that under an Act your client was also covered by a Certified Agreement.

During the 20VV-WW income year the Employer restructured their office. The restructure created a new position (Z position) which required the removal of X class positions (X positions) and the creation of another new position (Y position). This required the reallocation of duties across all positions.

In a letter dated during the 20VV-WW income year the Employer advised your client that they decided to restructure the office to create a new Z position to manage the office. Creating a Z position meant that the office would lose X positions and gain a Y position. As a consequence, the duties between the new positions would be reallocated. Under the proposed restructure, the X positions that your client occupied would be abolished and your client's employment will cease.

During the 20VV-WW income year your client received a letter (the letter) from the Employer which detailed the particulars of their final entitlements and advised that your client was entitled to payment of a severance benefit calculated on the length of continuous service under an Act.

In the letter your client was also advised that the client would be paid:

• unused annual leave;

• unused long service leave; and

• tax would be withheld from these payments.

During the 20VV-WW income year your client's employment with the Employer was terminated.

The PAYG payment summary - employment termination payment dated during the 20WW-AA income year from the Employer stated that a payment was paid to your client during the 20VV-WW income year and comprised wholly of a taxable component. There was an amount of tax withheld.

The Employment Agreement shows your client was not employed for a fixed term or required to terminate employment at a particular date or age.

At the time of the termination of employment there was no arrangement between your client and the Employer or between the Employer and another person, to employ your client after the termination.

Your client is under 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 section 83-10

Income Tax Assessment Act 1997 section 83-15

Income Tax Assessment Act 1997 section 83-80

Income Tax Assessment Act 1997 section 83-85

Income Tax Assessment Act 1997 section 83-170

Income Tax Assessment Act 1997 section 83-175

Reasons for decision

Summary

The severance payment your client received upon termination of employment is a genuine redundancy payment. As the payment is below the calculated tax-free amount of a genuine redundancy payment, the entire amount is non-assessable, non-exempt income.

As the payments received by your client for unused annual leave and unused long service leave were made in connection with a genuine redundancy payment, tax offsets under sections 83-15 and 83-85 of the Income Tax Assessment Act 1997 (ITAA 1997) respectively apply.

Detailed reasoning

Genuine redundancy payments

A payment made to an employee is a genuine redundancy payment if it satisfies all the conditions set out in section 83-175 of 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 as 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 the 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)).

Payments mentioned in section 82-135 of the ITAA 1997 include (among others):

_ unused annual leave payments (paragraph 82-135(c)); and

_ unused long service leave payments (paragraph 82-135(d)).

Therefore, the payments your client received for unused annual leave and unused long service leave are not genuine redundancy payments pursuant to subsection 83-175(4) of the ITAA 1997. The taxation treatment of these payments will be addressed in due course.

The requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy payment under section 83-175 of the ITAA 1997 are discussed in Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2).

With regard to the first requirement set out in subsection 83-175(1) of the ITAA 1997, the Commissioner considers that there are four necessary components within this requirement:

• the payment must be received in consequence of an employee's termination;

• the termination must involve the employee being dismissed from employment;

• dismissal must be caused by the redundancy of the employee's position; and

• the redundancy payment must be made genuinely because of a redundancy.

Payment received 'in consequence of' the termination

In this case, your client's employment was terminated during the 20VV-WW income year, and as a result of the termination, your client received the severance payment. It is evident from this and the facts provided that but for the termination your client would not have received that payment. Therefore, it is considered that the severance payment was received by your client in consequence of the termination of their employment.

Meaning of 'dismissal' and 'redundancy'

The terms 'dismissal' and 'redundancy' are not defined in the ITAA 1997 therefore, consistent with basic principles of statutory interpretation, their meaning must be determined according to the ordinary meaning of the words, having regard to the context in which they appear.

Accordingly, the Commissioner's view, as stated in Taxation Ruling TR 2009/2, is that dismissal means a decision to terminate employment at the employer's initiative without the consent of the employee. This stands in contrast to employment that is terminated at the initiative of the employee, for example in the case of resignation.

A position is redundant when the functions, duties and responsibilities formerly attached to the position are determined by the employer to be unnecessary to the current needs and purposes of the organisation. A dismissal is not caused by redundancy where personal acts or default are the cause for termination for example, unsatisfactory performance or behaviour.

Contrived cases of redundancy will not meet the conditions in section 83-175 of the ITAA 1997. The fact that an employer and employee have an understanding that a payment on termination is caused by redundancy, or that the employer treats the payment as a redundancy payment for tax purposes, does not of itself establish genuine redundancy.

Applying the above to your client's circumstances, it is considered that your client received the severance payment and payments for unused leave and unused long service leave because her/his position was genuinely redundant. This view is based on the following:

• Your client's employment was terminated at the Employer's initiative and without your client's consent;

• Your client was terminated because their position was no longer needed following a restructure within the Employer's office (as shown in the letter from the Employer);

• There is nothing to indicate that your client's employment was terminated because of any personal acts or default on their part; and

• There is nothing to indicate that the redundancy was in any way contrived.

Does the payment exceed the amount that could reasonably be expected?

As it is accepted that there was a dismissal because your client's position was made redundant, part of the condition under subsection 83-175(1) of the ITAA 1997 has been met.

Subsection 83-175(1) of the ITAA 1997 also requires that for a payment to be a genuine redundancy payment, it must exceed the amount that would have been received by the employee on voluntary termination of employment. That is, only that part of the payment that exceeds the amount that could reasonably be expected to be received by the employee had the employee voluntarily terminated their employment at the time of dismissal is treated as a genuine redundancy payment. To that effect, TR 2009/2, at paragraph 61 states:

It would generally be expected that a greater amount would be paid on redundancy than voluntary termination. This recognises the purpose of redundancy payments, being primarily to compensate for loss of non-transferable entitlements (for example accrued sick leave and accrued long service leave prior to 10 years service) and the peculiar hardship associated with being made redundant.

In this case, the severance payment was paid to your client because their employment was terminated by the Employer. This amount would not have been paid to your client had your client resigned voluntarily. Therefore, the termination payment is in excess of the amount that would have been reasonably expected if your client voluntarily resigned from employment with the Employer.

Other conditions

As previously discussed, the severance payment, to qualify as a genuine redundancy payment, must also meet the remaining conditions pertaining to subsections 83-175(2), 83-175(3) and 83-175(4) of the ITAA 1997.

In your client's case it is considered that all of the remaining conditions have been satisfied as:

• Your client was dismissed before your client turned 65 years of age and, as shown in the Employment Agreement, your client was not employed for a fixed term or required to terminate employment on a predetermined date;

• Your client's dismissal was at arm's length;

• At the time of dismissal, there was no arrangement between your client and the Employer, or between the Employer and another person to employ your client after the dismissal;

• The severance payment does not include a payment in lieu of superannuation benefits to which your client may have become entitled;

• The severance payment is not excluded from the definition of a genuine redundancy payment.

As all the conditions under section 83-175 of the ITAA 1997 are satisfied, it is accepted that the severance payment totalling $xx,xxx is a genuine redundancy payment.

Taxation of genuine redundancy payments

Section 83-170 of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula in subsection (3) is not assessable income and is not exempt income, that is, it is tax-free. The formula for working out the tax-free amount is:

Base amount + (Service amount x Years of service)

The Base amount and the Service amount for the 20VV-WW income year are:

Base amount $9,246

Service amount $4,624

Years of service for the purposes of subsection 83-170(3) of the ITAA 1997 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 six months, eight months or even eleven months do not count as a whole year for the purposes of this calculation.

During the 20VV-WW income year, your client received a severance payment which, as discussed earlier, is a genuine redundancy payment.

As the amount is below the tax free amount it is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997.

Taxation treatment of unused annual leave and unused long service payments

Unused annual leave and unused long service payments would ordinarily be included in assessable income under sections 83-10 and 83-80 of the ITAA 1997 respectively and be subject to marginal rates of tax.

However, in your client's case, as these payments were be made in connection with a genuine redundancy payment, sections 83-15 and 83-85 of the ITAA 1997 apply to allow tax offsets which ensure the rate of tax on these amounts (for unused annual leave and for unused long service) do not exceed 30% plus Medicare levy.