Edited version of your written advice

Authorisation Number: 1013002046038

Date of advice: 26 April 2016

Ruling

Subject: Genuine redundancy payments

Question

Are the payments you received, on termination of your employment, genuine redundancy payments in accordance with section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are under age 65.

You commenced employment with the Employer for an initial fixed term.

Your contract was subsequently extended for a further period.

You were advised that your position would be abolished. Your employment was terminated before the end of the contract extension.

You received pay in lieu of notice, additional salary for the remainder of your contract term and a severance payment.

Relevant legislative provisions

Income Tax assessment Act 1997 section 83-170

Income Tax assessment Act 1997 subsection 83-170(1)

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 payments you received as a result of the termination of your employment are genuine redundancy payments under section 83-175 of the ITAA 1997.

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).

Subsection 83-175(1) of the ITAA 1997 requires that:

• The payment is received by an employee who is dismissed from employment because the employee's position is genuinely redundant; and

• The payment 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.

The Commissioner has issued Taxation Ruling TR 2009/2 (TR 2009/2), titled Income Tax: genuine redundancy payments, which provides guidance on the interpretation of section 83-175 of the ITAA 1997.

Position genuinely redundant

Paragraph 18 of TR 2009/2 states:

Dismissal is a particular mode of employment termination. It requires 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.

Based on the correspondence with the Employer, it can be established that the decision to terminate your employment was initiated by the Employer without your consent.

Paragraph 25 of TR 2009/2 states:

An employee's position is redundant when an employer determines that it is superfluous to the employer's needs and the employer does not want the position to be occupied by anyone.

From the Employer's correspondence, it was evident that the Employer determined it no longer required your position, and that the position would be abolished, rather than occupied by someone else.

Payment in excess of the amount expected to be received on voluntary termination

Your original employment contract states that if your employment is terminated by the Company, the Company can exercise its discretion to make a payment in lieu of all or part of the notice of termination.

As such, the Employer decided to make a payment in lieu of the full notice period.

You are also entitled to a percentage of salary for each full year of service remaining under the contract, if the employment is terminated by the Company.

Your contract extension states that the terms and conditions of your previous contract remain the same for the contract extension.

You also received a severance payment under a Deed.

Hence, these payments will be in excess of the amount that could reasonably be expected to be received if you had initiated the termination.

Further, all of the following conditions from subsections 83-175(2) and 83-175(3) of the ITAA 1997 must be met:

(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.

Dismissal before age 65 or expiration of fixed term

Your employment was terminated when you were below age 65.

The timing of your dismissal would therefore satisfy this condition.

Arm's length dismissal

The information provided shows the dismissal was at arm's length and the actual amount you received was not greater than a reasonable arm's length payment.

No arrangement to employ the employee after dismissal

At the time of dismissal, there was no agreement in place between yourself and the employer, or between the employer and another person to employ you after the dismissal.

Not a payment received in lieu of superannuation benefits

Based on the Employer's calculation of your final payments, the payments you received were not in lieu of superannuation benefits.

Subsequently, the conditions pertaining to section 83-175 of the ITAA 1997 have been satisfied.

Therefore, the payments received from the employer will be a GRP under section 83-175 of the ITAA 1997.

Tax-free treatment of genuine redundancy payments

Section 83-170 of the ITAA 1997 applies to determine the tax-free treatment of a GRP and places a limit on the amount that is eligible for concessional tax treatment.

So much of the GRP that does not exceed the amount worked out using the prescribed formula is not assessable income and is not exempt income. Under subsection 83-170(3) of the ITAA 1997, the formula for working out the tax free amount is:

Base amount + (Service amount x Years of service)

As your dismissal occurred during the 2015-16 income year, the base amount will be $9,780 and the service amount will be $4,891.

The remainder of these payments (up to the ETP cap of $195,000) will be taxed concessionally at 17%, as you have reached preservation age.

ATO view documents

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)

Taxation Ruling TR 2009/2 Income Tax: genuine redundancy payments