Edited version of private advice

Authorisation Number: 1051557922154

Date of advice: 31 July 2019

Ruling

Subject: Genuine redundancy payment

Question 1

With regard to your PAYG withholding obligations, will the lump sum termination payment made to an Executive Director be a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, the lump sum will be a genuine redundancy payment. You will be required to withhold tax in accordance with section 12-85 of the Taxation Administration Act 1953 (TAA) for the amount of the lump sum that is not tax-free.

This ruling applies for the following period:

1 July 2019 to 30 June 2020

Relevant facts and circumstances

·        After a strategic review of its business, the Employer reached an agreement to sell certain elements of the business to an unrelated entity (the Purchaser).

·        In accordance with the sale agreement, the Purchaser will be required to make offers of employment to certain employees affected by the sale, on terms and conditions which are comparable overall to those they currently have with the Employer. Offers of employment will also recognise each transferring employee's service entitlements, which will be paid for by the Employer.

·        On the basis that these offers of employment will be comparable and service recognised, redundancies will not be payable by the Employer to the relevant employees, including any employee who does not accept an offer of employment with the Purchaser.

·        Under the terms of sale agreement the Purchaser is under no legal obligation to make an offer of employment to the Executive Director (ED) of the Employer.

·        The Purchaser advised the Employer that it does not intend to make an offer of employment to the ED, either now or in the foreseeable future.

·        As the Employer has no on-going requirement for the ED's role on completion of the sale to the Purchaser, the ED's employment with the Employer will come to an end. On termination of employment a lump sum payment will be made to the ED, together with a payment in lieu of notice. The payment will not be in lieu of superannuation benefits. The ED is under 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 83-170

Income Tax Assessment Act 1997 section 83-175

Taxation Administration Act 1953, Schedule 1, section 12-85

We followed these ATO view documents

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

Reasons for decision

Detailed reasoning

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

In accordance with subsection 83-175(1) of the ITAA 1997, 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, as 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 the dismissal.

Paragraph 11 of Taxation Ruling TR 2009/2: Income tax: genuine redundancy payments (TR 2009/2), outlines the requirements to be satisfied under subsection 83-175(1) of the ITAA 1997. 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.

Based on the information provided, the essential components of subsection 83-175(1) of the ITAA 1997 have been satisfied in this case, however there are further conditions that must be met before the payment can be treated as a genuine redundancy. Conditions in subsections 83-175(2) and (3) of the ITAA 1997 require that:

·        the dismissed employee is not older than specified age limits

·        the termination is not at the end of a fixed period of employment

·        the actual 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 the employee or the employer and another entity to employ the dismissed employee after the termination (paragraph 83-175(2)(c)); and

·        the payment is not in lieu of superannuation benefits.

Based on the facts, all conditions in subsections 83-175(2) and (3) of the ITAA 1997 have been met. In particular there is no arrangement between the Executive Director and the employer, or between the employer and another person, to employ the Executive Director after the dismissal?

Conclusion

It is considered that the Executive Director was dismissed from employment with Employer due to their position becoming genuinely redundant.

Subsection 83-170(2) of the ITAA 1997 states that the extent of the genuine redundancy payment that does not exceed the amount worked out in subsection 83-170(3) of the ITAA 1997 is non-assessable and non-exempt income.

Any amount in excess of the tax-free amount is will be classed as an 'employment termination payment' (ETP), as defined in section 82-130 of the ITAA 1997. An employer is required to withhold an amount of tax for an ETP in accordance with section 12-85 of the Taxation Administration Act 1953.