Edited version of your written advice

Authorisation Number: 1051306745190

Date of advice: 27 November 2017

Ruling

Subject: Termination Payments

Question 1

Is the ex-gratia payment a genuine redundancy payment as defined in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is the four weeks’ pay in lieu of notice a genuine redundancy payment?

Answer

No

Question 3

Is the payment for unused rostered days off (RDOs) an eligible termination payment (ETP)?

Answer

Yes

Question 4

Are you entitled to a tax offset under section 83-15 of the ITAA 1997 to limit the rate of tax on the annual leave and leave loading payments to 30%?

Answer

Yes

Question 5

Are any of the termination payments ordinary times earnings for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Answer

The request is not valid.

This ruling applies for the following period:

Income year ended 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You commenced employment with the Employer in 201A.

You were made redundant from your position in 201B and have a total of 4 years completed service.

As per the ‘Deed of Release’ (the Deed) your position was made redundant and you were terminated due to operational requirements. As the Employer is a small business employer (as defined in the Fair Work Act 2009) there is no requirement to make redundancy payments.

Under the Deed, your severance pay was calculated at 4 weeks ex-gratia payments plus 4 weeks payment in lieu of notice and other various entitlements.

The final payments were as follows:

Ex-Gratia Payment	$ X,XXX.XX
Payment in Lieu of Notice	$ X,XXX.XX
Annual Leave (incl. leave loading)	$ X,XXX.XX
RDO (Remaining balance)	$ XXX.XX
Total Gross	$XX,XXX.XX

You were over 60 years old as at the termination date.

Relevant legislative provisions

Income Tax Assessment Act 1997 s83-175

Income Tax Assessment Act 1997 s83-170

Income Tax Assessment Act 1997 s83-15

Income Tax Assessment Act 1997 s82-130

Reasons for decision

Summary

The ‘ex-gratia’ payment is a genuine redundancy payment and the amount of $xxxx is tax-free.

The payments in lieu of notice as well as for unused rostered days off are an ETP.

Annual leave and leave loading payments were due to a genuine redundancy and you are entitled to a tax offset to ensure the rate of tax does not exceed 30%.

Detailed reasoning

Genuine redundancy payments

In accordance with subsection 83-175 (1) of the ITAA 1997, a genuine redundancy payment is so much of a payment that:

● is 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 at the time of the dismissal.

Further conditions for a genuine redundancy payment

Before a payment that meets the basic redundancy requirement in subsection 83-175(1) of the ITAA 1997 qualifies as a genuine redundancy payment, all other conditions in subsections 83-175(2) and (3) of the ITAA 1997 must be met. These conditions include:

● the payment must be made before a person turns 65 or an earlier mandatory age;

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

● the actual amount that was paid is not greater than the amount that could reasonably be expected to be paid had the parties been dealing at arm’s length;

● there was no arrangement for re-employment with the employer or a related party after the termination date;

● the payment was not in lieu of superannuation benefits; and

● the payment is not mentioned in section 82-135 of the ITAA 1997.

The facts show your employment was terminated because your position was genuinely redundant which satisfies part of the conditions under subsection 83-175(1) of the ITAA. Subsection 83-175(1) of the ITAA 1997 also requires that for the payment to be a genuine redundancy payment, it should exceed what you would have received had you voluntarily resigned from your employment. That is, only that part of the payment that exceeds the amount that could reasonably be expected to be received had you voluntarily terminated is treated as a genuine redundancy.

The ex-gratia payment

In accordance with the Deed, you received as a “gesture of goodwill” an amount which is a payment equivalent to 4 weeks’ pay and was paid in addition to your statutory entitlements on termination and was classified as an ‘ex-gratia’ payment by the Employer.

Therefore, in absence of the Deed, this amount could not reasonably be expected to be received if you voluntarily terminated employment.

Consequently, the ‘ex-gratia’ payment is considered in excess of an amount that could reasonably be expected to be received in consequence of a voluntary termination. The further conditions are also satisfied, therefore, the ex-gratia payment is a genuine redundancy payment.

The payment in lieu of notice

An employer is required to give notice to an employee when ending the person’s employment. Similarly, an employee is required to give notice to their employer when they are ending their employment. The employer can decide if they want the employee to work out the notice period or make a payment in lieu.

Your employer did not require you to work out the notice period and made a payment in lieu. There is nothing to show you could not reasonably expect to have received a payment in lieu if you voluntarily terminated your employment and were not required to work out the notice period. Accordingly, the pay in lieu of notice is not a genuine redundancy payment.

Tax-free amount of a genuine redundancy payment

Genuine redundancy payments are tax-free up to a limit based on an employee’s years of service. The whole of your ‘ex-gratia’ payment is tax-free as it is within the limit.

Employment termination payment

Section 82-130 of the ITAA 1997 provides that a payment is an ETP if it is received:

● in consequence of the termination of employment;

● no later than 12 months after the termination; and

● is not mentioned in section 82-135.

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this phrase, the Commissioner’s view on the meaning and application of the 'in consequence of' test are set out in 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).

While TR 2003/13 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner.

In paragraph 5 of TR 2003/13 the Commissioner states:

5. ... a payment is received by a taxpayer in consequence of the termination of the taxpayer’s employment if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been received by the taxpayer.

In this case you received a lump sum payment for your unused RDO’s because your employment was terminated. That is, the payment was made in consequence of the termination of your employment. The payment was made within 12 months of the termination and is not mentioned in section 82-135 of the ITAA 1997. Therefore, the payment for unused RDO’s is an ETP.

As you were over 60 years at the time of your redundancy your ETP, the payment in lieu of notice and the payment for unused RDO’s, is subject to a maximum tax rate of 15% (not including medicare levy).

Taxation treatment of unused annual leave and unused long service payments

Any unused annual leave and leave loading would ordinarily be included in assessable income under section 83-10 of the ITAA 1997 and subject to marginal rates of tax. However, as this payment was made in connection with a genuine redundancy payment, section 83-15 of the ITAA 1997 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%. Your PAYG payment summary for the income year ended 30 June 2018 should show a total amount of your annual leave amount including leave loading at label A.

Superannuation Guarantee

We can only provide private rulings on certain tax laws and are not able to provide a private ruling on the operation of the SGAA.