Edited version of private advice

Authorisation Number: 1051628514484

Date of advice: 25 March 2020

Ruling

Subject: Genuine redundancy payments

Question 1

Is the payment you received from a redundancy trust during the 20XX-XX income year a genuine redundancy payment?

Answer

No.

Question 2

Should tax be withheld from the payment you received from the redundancy trust during the 20XX-XX income year?

Answer

Yes.

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are not over 65 years of age.

Your authorised tax agent applied for a private ruling about a payment you received from a redundancy trust during the 20XX-XX income year.

In the private ruling application, your authorised tax agent advised the following:

·         You were made redundant from your employment with your former employer during the 20XX-XX income year.

·         You had been employed by your former employer for the last XX years.

·         You were entitled to an amount under your award.

·         A redundancy trust contributed an amount towards your payment. You also received an employment termination payment statement from the redundancy trust which advised that an amount had been withheld for tax.

·         The remaining amount of your payment was paid by your former employer and was not taxed as it was included at Lump Sum D on your PAYG payment summary. All payments received for outstanding annual and other leave were taxed accordingly.

·         The amount received from the redundancy trust was not included in your taxable income when your income tax return for the 20XX-XX income year was lodged.

·         Your notice of assessment for the 20XX-XX income year confirmed that your income tax return for the 20XX-XX income year had been amended to include the amount received from the redundancy trust in your taxable income.

Your authorised tax advised that the payment you received from the redundancy trust should not be taxed as it was a genuine redundancy payment. We were also advised that your authorised tax agent had contacted the redundancy trust and had been advised that all payments paid from them were processed as employment termination payments. We confirmed that the payment you had received from the redundancy trust had been reported as an employment termination payment.

The following information was confirmed by your tax agent:

·         You commenced employment with your former employer in the 20XX-20XX income year.

·         You were a Project Manager with your former employer before your employment was terminated.

·         A copy of your employment contract or the award or agreement containing the terms and conditions of your employment could not be provided. However, the completed Redundancy Benefit Claim form for the redundancy trust advised that you were entitled to an amount under your award or enterprise agreement.

·         Your employment was terminated by your former employer as the depot where you were employed had been closed.

·         You received an amount for unused long service leave, an amount for accrued annual leave and an amount as a payment from your former employer.

·         You also received an amount from the redundancy trust which had an amount withheld for tax and an amount deducted for bank fees.

·         Your employment with your former employer was ongoing and did not have a cessation date.

·         You were only entitled to an amount for accrued annual leave and an amount for unused long service leave if you had resigned voluntarily from your employment with your former employer.

·         There were no other connections between you and your former employer as you were an unrelated employee.

·         There were no arrangements between yourself and your former employer or any other person or entity for future employment existing at the time your employment was terminated.

·         The following supporting documentation was provided by your authorised tax agent:

·         Your notice of assessment for the 20XX-XX income year.

·         A pre-filling report which was used to assist your authorised tax agent in completing your income tax return for the 20XX-XX income year.

·         A completed Redundancy Benefit Claim form for the redundancy trust which stated the amount of your entitlement under your award or enterprise agreement. It also confirmed that the redundancy trust would pay some of this amount with the remaining amount to be paid by your former employer.

·         A completed PAYG payment summary - employment termination payment which confirmed the taxable component of your employment termination payment, the total tax withheld from your employment termination payment and the date of payment of your employment termination payment.

·         Correspondence from the redundancy trust which confirmed the amount of your employment termination payment. It also confirmed the total tax that had been withheld from your employment termination payment, the amount that had been deducted for bank fees and the remaining benefit payment you would receive.

·         A completed Employment Separation Certificate which confirmed the amount of your final gross payment (including leave and redundancy payments) which consisted of a payment, your accrued annual leave and your unused long service leave. It also confirmed the date these amounts were paid and your average gross weekly wage.

·         Your final payslip from your former employer which confirmed the amount of your accrued annual leave and unused long service leave as well as the amount that was to be paid by the redundancy trust and your former employer.

The following information was confirmed by your tax agent to the ATO:

·         You were not employed under an Enterprise Bargaining Agreement or contract at the time of your termination. A copy of the reward was provided.

·         An award applied to your employment as well as the National Employment Standards within the Fair Work Act 2009.

·         Your employment classification was contained within the relevant award. The award also advised that redundancy pay was provided for in the National Employment Standards within the Fair Work Act 2009.

The following supporting documentation was also provided:

·         Correspondence from your former employer which advised that as a result of the closure of the depot due to economic downturn your position as Project Manager was no longer required and your employment was terminated. The correspondence from your former employer advised that this was not a reflection of your performance and confirmed the amounts and entitlements you would receive on termination or your employment which, where applicable, would be subject to tax in accordance with the current PAYG legislation.

We discussed with your tax agent the requirements of a genuine redundancy payment, the tax treatment of each element of the payment as well as the relevance of Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2).

Relevant legislative provisions

Income Tax Assessment Act 1997, Division 82

Income Tax Assessment Act 1997, Subdivision 83-C

Reasons for decision

Summary

The payment you received from the redundancy trust during the 2018-19 income year is not a genuine redundancy payment.

Tax should be withheld from the payment you received from the redundancy trust during the 20XX-XX income year at a rate of 32%.

Employment termination payments

Subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that a payment is an employment termination payment if:

(a)  it is received by you:

                                  (i)       in consequence of the termination of your employment; or

                                 (ii)       after another person's death, in consequence of the termination of the other person's employment; and

(b)  it is received no later than 12 months after that termination (but see subsection (4)); and

(c)  it is not a payment mentioned in section 82-135.

A life benefit termination payment is an employment termination payment to which subparagraph 82-130(1)(a)(i) of the ITAA 1997 applies. A life benefit termination payment consists of a tax-free component and a taxable component. A tax offset applies to the taxable component of a life benefit termination payment subject to certain limitations.

The withholding rate of the taxable component under the relevant cap amount of a life benefit termination payment for a person who is under their preservation age at the end of the income year in which they received the payment is 32%. This includes the Medicare levy of 2%.

Subsection 82-130(4) of the ITAA 1997 confirms that paragraph 82-130(1)(b) of the ITAA 1997 does not apply to payments that are genuine redundancy payments or early retirement scheme payments.

Section 82-135 of the ITAA 1997 identifies payments that are not employment termination payments. The tax-free part of a genuine redundancy payment or an early retirement scheme payment is not an employment termination payment.

Genuine redundancy payments

A payment made to an employee is a genuine redundancy payment if it satisfies the conditions and requirements of section 83-175 of the ITAA 1997.

Section 83-175 of the ITAA 1997 was recently amended by the Treasury Laws Amendment (2019 Measures No. 2) Act 2019. However, the amendments made to section 83-175 of the ITAA 1997 by the Treasury Laws Amendment (2019 Measures No. 2) Act 2019 only apply to payments received by employees on or after 1 July 2019 effective from 29 October 2019.

Section 83-175 of the ITAA 1997 formerly read:

(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 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.

(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 the 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)).

TR 2009/2 states that there are four main requirements that must be satisfied before a payment can be a genuine redundancy payment. These requirements are that:

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

·         The termination must involve the employee being dismissed from employment.

·         The dismissal must be caused by the redundancy of the employee's position.

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

TR 2009/2 provides guidance on these four main requirements at paragraphs 10-32 and 233-280.

There are also five further conditions that must be satisfied before a payment can be a genuine redundancy payment. These conditions are:

·         The dismissed employee is not older than the specified age limit.

·         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 and another entity to employ the dismissed employee after termination.

·         The payment is not in lieu of superannuation benefits.

TR 2009/2 provides guidance on these five further conditions at paragraphs 33-54 and 281-312.

Tax treatment of genuine redundancy payments

A genuine redundancy payment does not include any amount mentioned in section 82-135 of the ITAA 1997 (apart from the tax-free part of a genuine redundancy payment or an early retirement scheme payment). Any amount mentioned in section 82-135 of the ITAA 1997 (apart from the tax-free part of a genuine redundancy payment or an early retirement scheme payment) must be excluded.

TR 2009/2 explains at paragraphs 55-72 and 313-329 that the remaining amount must then be divided into three main parts to determine its appropriate tax treatment. These are:

·         The voluntary termination element

·         The tax-free genuine redundancy payment

·         The taxable genuine redundancy payment

TR 2009/2 states at paragraphs 57-65 and 319-329 that the voluntary termination element consists of the amount the employee could have reasonably expected to have received had he or she voluntarily terminated his or her employment at the time they were dismissed. This amount does not satisfy the requirements of subsection 83-175(1) of the ITAA 1997 and therefore is subject to tax as an employment termination payment if it has been received within 12 months of an employee's termination.

TR 2009/2 confirms at paragraphs 68-71 that the tax-free genuine redundancy payment consists of any excess amount above the voluntary termination element but only up to the tax-free threshold worked out under section 83-170 of the ITAA 1997 for the employee concerned. This amount is not assessable income and is not exempt income.

TR 2009/2 states at paragraph 72 that the taxable genuine redundancy payment consists of any further excess amount above the total of the voluntary termination element and the tax-free genuine redundancy payment. This amount is taxed as an employment termination payment even if it has been received more than 12 months after an employee's termination.

TR 2009/2 provides guidance on receiving multiple payments for one dismissal due to redundancy at paragraphs 73-78 and 330-338.

Application to your circumstances

You received a payment from a redundancy trust.

This payment was received in consequence of the termination of your employment with your former employer as you had been dismissed. Your dismissal was caused by the redundancy of your position with your former employer and was not contrived.

You were dismissed from your employment with your former employer before you turned 65 years of age. You did not have any other connections or arrangements with your former employer or another entity for future employment opportunities at the time your employment was terminated and the amount paid to you was at arm's length. The termination of your employment with your former employer was not at the end of a fixed period of employment or in lieu of superannuation benefits.

The payment you received from the redundancy trust did not include any amounts mentioned in section 82-135 of the ITAA 1997. Therefore, the payment must be divided into the voluntary termination element, the tax-free genuine redundancy payment and the taxable genuine redundancy payment to determine its appropriate tax treatment.

The voluntary termination element consists of the whole amount you received from the redundancy trust. You would have received this amount had you terminated or ceased your employment with your former employer for any reason and therefore you could have reasonably expected to have received this amount had you voluntarily terminated your employment at the time you were dismissed.

As the payment you received from the redundancy trust does not satisfy the requirements of subsection 83-175(1) of the ITAA 1997 to be a genuine redundancy payment, it is subject to tax as an employment termination payment since it was received within 12 months of your employment with your former employer terminating.

The payment you received from the redundancy trust should be taxed as an employment termination payment at a rate of 32% with an amount being withheld for tax.