Edited version of your written advice

Authorisation Number: 1051198792663

Date of advice: 3 March 2017

Ruling

Subject: Genuine redundancy

Question

Is any part of the termination payment paid to employee the tax-free part of a genuine redundancy payment?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20ZZ.

The scheme commences on:

1 July 20YY.

Relevant facts and circumstances

The Employee commenced employment with the Employer many years ago at a certain level.

In 20WW the Employee was appointed to a higher level position under an employment contract (the Contract) for a specified number of years.

In relation to the Contract's terms and conditions they were specified in another document.

In the document there were listed clauses relating to payments on termination employment under various circumstances. In the case of termination of employment at the initiative of the Employee it stated the only payments the Employee would be entitled as at the date of termination were:

● accrued recreation leave;

● accrued pro-rata long service leave; and

● superannuation benefits where applicable.

In 20WW-XX income year, following a review of the structures and roles within the Employer's organisation, the Employee was issued with a Notice of Termination (the Notice).

In the Notice the Employee was advised:

(a) the higher level position would cease to exist and be replaced with a lower classified position as the responsibilities associated with the position would be reduced;

(b) the Employee's employment was terminated pursuant to certain clauses of the relevant document;

(c) termination of employment was effective from a date in the 20YY-ZZ income year; and

(d) the Employee would be paid:

● a total of XX weeks remuneration in accordance with a clause of relating to termination payments for other reasons in the relevant document;

● all accrued entitlements; and

● as the Employer considered the Employee's position to be made redundant, an additional XX weeks' remuneration in accordance with a section (the Section) in a Commonwealth Act (the Act ).

A third party advised the Employer that it does not consider the Employee's termination of employment to meet the test for redundancy under the Section in the Act.

There was no arrangement between the Employee and the Employer, or the Employer and another party, to re-employ the Employee.

None of the termination payment to be made to the Employee is in lieu of superannuation benefits.

The Employee is less than 65 years of age.

The termination payment has not yet been paid, but the payment will be made in the 20YY-ZZ income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 82-130.

Income Tax Assessment Act 1997 section 82-135.

Income Tax Assessment Act 1997 section 83-170.

Income Tax Assessment Act 1997 section 83-175.

Reasons for decision

Summary

The termination payment that the Employee receives due to the termination of her employment is a genuine redundancy payment.

The amount of the termination payment that exceeds the tax-free amount calculated in accordance with the formula in subsection 83-170(3) of the Income Tax Assessment Act 1997 (ITAA 1997)  is taxed as an employment termination payment.

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)).

In order to satisfy the definition of a genuine redundancy payment under subsection 83-175(1) of the ITAA 1997 there must be a dismissal from employment and the dismissal must result from the position being made genuinely redundant.

Dismissal caused by redundancy

From the facts the Employee's employment was terminated effective from a date in 20XX-YY in accordance with a Notice of Termination (the Notice) which the Employer issued to the Employee. The Notice supports there being a 'dismissal' for the purposes of the first component of subsection 83-175(1) of the ITAA 1997.

However, whether or not the dismissal resulted from the Employee's position being made genuinely redundant needs to be determined.

The Notice states that the position held by the Employee would no longer exist and that the portfolio of responsibility that was associated with that position would be reduced and relegated to a position at a lower level.

This is similar to a situation outlined in Taxation Ruling TR 2009/2 Income Tax: genuine redundancy payments, which states:

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. On occasion the decision may be unavoidable due to the circumstances surrounding the employer's operations.

26. In some circumstances, an employer may reallocate the duties and functions attached to a particular position to another position within the employer's organisational structure. In such cases, the former position is redundant. However, if the employee who had been working in that position is still employed by the employer following the reallocation of duties and functions, there will not be a dismissal

Notwithstanding a third party does not consider the Employee's termination of employment to meet the test for redundancy under a section under another Commonwealth Act, it should be noted that this does not alter the Commissioner of Taxation's view that for the purposes of the ITAA 1997 the Employee's position was made genuinely redundant.

In relation to the termination payment it is accepted that, in light of the facts provided, particularly the employment contract and the associated documents, this payment exceeds the amount that the Employee could reasonably expect to receive if the Employee had voluntarily resigned or retired from the employment in the position held at the time of the dismissal.

Consequently, the requirements under subsection 83-175(1) of the ITAA 1997 have been satisfied.

Remaining conditions

Further to the above, the remaining conditions under section 83-175 of the ITAA 1997 are satisfied as:

● the Employee's employment was terminated before the end of a fixed period of employment;

● the actual amount paid is not greater than an arms-length amount;

● the Employee is less than 65 years of age;

● none of termination payment is in lieu of superannuation; and

● there was no arrangement between the Employee and the Employer, or between the Employer and another person, to employ the Employee following the termination of employment.

As all the conditions under section 83-175 of the ITAA 1997 have been satisfied, it is considered that the termination payment represents 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 $9,936;

Service amount means $4,969; and

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

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

= $9,936 + (4,969 x XX years)

=$YY

Thus $YY of the termination payment is the tax-free amount which, is non-assessable and non-exempt income under subsection 83-170(2) of the ITAA 1997.

In relation to the amount of the termination payment in excess of the tax-free amount it is treated as an employment termination payment.