Edited version of your written advice

Authorisation Number: 1051184232758

Date of advice: 24 January 2017

Ruling

Subject: Employment termination payments

Question

Is any part of the lump sum payment received by a person (the Taxpayer) on the termination of their employment a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

Income year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The Taxpayer commenced employment with an entity (the Employer).

The Taxpayer's employment was terminated by the Employer as the Taxpayer's position had been made redundant due to lack of work prior to the completion of the project.

The Taxpayer was employed under an Enterprise Agreement (the Agreement).

The Taxpayer was employed under an ongoing employment arrangement. There was no fixed period for employment.

The Taxpayer received a lump sum amount consisting of the following:

● Special leave;

● Annual leave;

● Rostered days off (RDOs);

● Severance payment; and

● Sick leave.

Correspondence from the Employer stated that the annual leave payment should be excluded from the breakdown of the termination payment. This payment was shown as a lump sum A with a code 'R' on the Taxpayer's PAYG payment summary - individual non-business.

The Taxpayer was issued with a PAYG payment summary employment termination payment. This payment summary shows the total amount comprising the special leave, RDOs, severance payment and sick leave as being entirely a taxable component and treated as an 'Employment termination payment (ETP) code O'.

The Taxpayer is less than 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 82-135.

Income Tax Assessment Act 1997, section 83-170(2).

Income Tax Assessment Act 1997, section 83-170(3).

Income Tax Assessment Act 1997, section 83-175.

Reasons for decision

Summary

Part of the lump sum payment received by the Taxpayer, the amount consisting of a severance package, is a genuine redundancy payment (GRP) as defined in section 83-175 of the Income Tax Assessment Act 1997 ( ITAA 1997). The entirety of the severance package amount is tax free as it is below the tax free amount calculated under subsection 83-170(3).

The remainder of the lump sum, consisting of amounts relating to the Taxpayer's accrued RDOs, special leave and sick leave, is not a GRP. These amounts would have been received had the Taxpayer voluntarily terminated employment.

Detailed reasoning

A payment made to an employee is a GRP if it satisfies all the criteria in section 83-175 of the ITAA 1997.

In accordance with subsection 83-175(1) of the ITAA 1997, a GRP 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 their employment.

The Commissioner of Taxation has issued Taxation Ruling TR 2009/1 Income tax: genuine redundancy payments (TR 2009/2), which outlines the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a GRP under section 83-175 of the ITAA 1997.

In discussing what constitutes a GRP for the purposes of subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states:

There are four necessary components within this requirement:

● The payment being tested must be received in consequence of an employee's termination.

● That termination must involve an employee being dismissed from employment.

● That dismissal must be caused by the redundancy of the employee's position.

● The redundancy payment must be made genuinely because of a redundancy.

'Dismissal' and 'redundancy'

The Commissioner's view, as stated in paragraphs 18 and 25 of TR 2009/2 is that:

18. 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 the employment that is terminated at the initiative of the employee…

25. 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. Accordingly, it is fundamentally the employer's decision that a position is redundant

In this instance it is clear that the Taxpayer did not voluntarily resign, rather their employment was terminated because the position that the Taxpayer occupied was no longer needed and the Employer did not want the position to be occupied by anyone.

However, while it is accepted that the Taxpayer was dismissed from employment because their positon was genuinely redundant, subsection 83-175(1) of the ITAA 1997 also requires that the payment received in consequence of redundancy exceeds the amount that the Taxpayer would have received had they voluntarily resigned from employment.

In this instance, the Agreement clearly states that any accrued RDOs, special leave and sick leave would be paid on termination of the Taxpayer's employment. These payments would have occurred if the Taxpayer had voluntarily terminated their employment. Therefore, it is considered that the payment of these amounts does not satisfy the conditions of a GRP.

In contrast the severance payment is considered to meet the requirements of subsection 83-75(1) of the ITAA 1997. This amount was received as a redundancy payout under the Agreement and exceeds what the Taxpayer would have received upon a voluntary termination of employment.

Further conditions for a genuine redundancy payment

Further to the basic requirement for a GRP found in subsection 83- 75(1) of the ITAA 1997, the conditions for genuine redundancy treatment in subsections 83-175(2) and (3) also require that:

● the employee is dismissed before the earlier of 65 or a specified age;

● the termination is not at the end of a fixed period of employment;

● the amount paid is not greater than the amount that could reasonably be expected had the parties been dealing at arm's length, (in the event that the employer and employee are in fact not dealing at arm's length in relation to the dismissal);

● there is no arrangement entered into between the employer and employee or the employer and another entity to employ the dismissed employee after the termination; and

● the payment is not in lieu of superannuation benefits.

In this case, the severance payment amount is considered to be a GRP as it satisfies all of the above conditions.

Tax treatment of genuine redundancy payments

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 (ETP). The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

For the 2015-16 income year:

Base amount is an amount;

Service amount is an amount ; and

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

Accordingly, under subsection 83-175(3) of the ITAA 1997, the tax-free part of the Taxpayer's GRP is:

An amount + (an amount × 0) = an amount

As the Taxpayer's GRP is below the tax-free amount calculated above, all of the GRP is non-assessable, non-exempt income.