Edited version of your written advice

Authorisation Number: 1012923146685

Date of advice: 4 December 2015

Ruling

Subject: Genuine redundancy payment

Question

Is any part of a lump sum payment received by your client a genuine redundancy payment?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20ZZ

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

Your client commenced employment with the Employer several years ago.

On a date in the 20XX-YY income year, your client's employment was terminated as a result of the Employer going into liquidation.

On a date in the 20XX-YY income year, your client made a claim to recover entitlements under a government Act (the Act).

On a date in the 20YY-ZZ income year, your client received a letter (the letter) outlining your client's entitlements under the Act.

In the letter, it stated your client was entitled to a gross payment which was made up of the various amounts which included amounts for payment in lieu of notice and a redundancy amount.

In the letter, you were also advised that the Liquidator was advised of the entitlements decision had had been forwarded the gross payment amount. Further, the Liquidator would deduct any tax if applicable from the payment.

On a date in the 20YY-ZZ income year, the Liquidator provided your client with a letter that, amongst other matters, the redundancy and payment in lieu of notice amounts would be taxed.

Enclosed with the letter from the Liquidator was a 'PAYG payment summary - employment termination payment' (the Summary) for the year ending 30 June 20ZZ, which shows the amount of pay in lieu of notice and redundancy was treated as follows:

• Taxable component - $x

• Tax withheld - $y

In the Summary, it also shows code 'R' was returned, that being the code for genuine redundancy.

You state that the Employment termination payment is a Genuine Redundancy Payment, that the 12 month rule does not apply and that the amount of $x represents a tax-free amount.

None of the payments your client received are for payment in lieu of superannuation.

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.

Your client is less than 55 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 82-130(4).

Income Tax Assessment Act 1997 section 82-135.

Income Tax Assessment Act 1997 paragraph 82-135(e).

Income Tax Assessment Act 1997 section 83-170.

Income Tax Assessment Act 1997 section 83-175.

Reasons for decision

Summary

The payment, which comprises the payment in lieu of notice and the redundancy payment, is a genuine redundancy payment. As this amount is less than your client's tax-free amount, it is not assessable income and is not exempt income.

Detailed reasoning

Genuine redundancy

A payment made to an employee is a genuine redundancy payment 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)).

Subsection 82-135 of the ITAA 1997 includes (among others):

• 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)).

The redundancy payment and the payment in lieu of notice, which total $x, are addressed below.

In a letter received in the 20YY-ZZ income year from the Liquidator, your client was advised that your client was entitled to a redundancy payment and a payment in lieu of notice. Tax was withheld from these payments, as shown in the 'PAYG payment summary - employment termination payment.'

When the Employer ceased trading and was placed into liquidation your client's position within the organisation effectively no longer existed and on a date in the 20YY-ZZ income year your client's employment was terminated. As such, it is considered that your client's employment was terminated because your client's position was made genuinely redundant. Further, neither the redundancy nor in lieu of notice payments would have been made to your client had your client 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:

• your client was dismissed before attaining 65 years of age;

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

• 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.

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.

Lastly, the redundancy payment and payment in lieu of notice are not excluded from the definition of a genuine redundancy payment. 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 considered that the total payment of $x, comprising the redundancy payment and payment in lieu of notice, represent a genuine redundancy payment.

Tax-free amount

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 20YY-ZZ income year:

Base amount means $9,514;

Service amount means $4,758; and

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

Your client's employment commenced on a date in the 20VV-WW income year and ceased on
a date in the 20YY-ZZ income year. Hence the 'years of service' to which the genuine redundancy payment relates is seven whole years of service.

Accordingly, the tax-free part of a genuine redundancy payment your client could receive in the 20YY-ZZ income year under subsection 83-175(3) of the ITAA 1997 is:

$9,514 + ($4,758 × c years) = $XX

As the payment of $x is below the tax-free amount of a genuine redundancy payment, the entire amount of the payment is the tax-free part of a genuine redundancy payment. This tax-free amount is non-assessable and non-exempt income under subsection 83-170(2) of the ITAA 1997.

Consequently the amount of $x is not required to be included in your client's income tax return for the 20YY-ZZ income year.

Further, it should be noted:

(a) as no amount of the genuine redundancy payment is excess of the tax-free amount there is no amount to be treated as the taxable component of an employment termination payment (ETP); and

(b) the 12 month rule, which relates to ETPs, does not apply to a genuine redundancy payment or an early retirement payment scheme payment (subsection 82-130(4) of the ITAA 1997).