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Edited version of private advice
Authorisation Number: 1051810315084
Date of advice: 03 March 2021
Ruling
Subject: Genuine redundancy payment
Question 1
Is any part of the payment in lieu of notice a genuine redundancy payment under section 83-175 of the Income Tax assessment Act 1997 (ITAA 1997)?
Answer
Yes, see our reasons for decision
This ruling applies for the following period:
Year ending 2021
The scheme commences on:
1 July 2020
1. The client provided copies of their employment agreements, listing the commencement date of employment and terms and conditions of employment.
2. The Client's employer gave them a termination letter in 2020-21 income year detailing the date and reason for termination.
3. The client provided information on the benefits they were entitled to.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 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 client's payment in lieu of notice includes a genuine redundancy portion. This tax-free component is not included in your assessable income.
The remaining amount of the payment in lieu of notice, above the tax-free amount for 2020-21 is an employment termination payment as this payment will be included in the client's assessable income.
Detailed reasoning
Genuine redundancy payments
A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all criteria set out in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997) which 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 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 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)).
We confirm you were terminated from your employment and your position was made redundant.
A genuine redundancy payment was made a result of termination and the client received a severance payment which was treated as a genuine redundancy payment (GRP).
The payment was below the tax-free amount of the GRP for the 2020-21 income year and it was in excess of the amount that could reasonably be expected to be received as consequence of voluntary termination. Therefore, it is accepted that all the conditions in subsection 83-175(1) of the ITAA 1997 have been satisfied.
Additional payments were a payment in lieu of notice and accrued annual leave.
An examination of the client's employment agreement found that the client was no expected to receive a payment in lieu of notice if the termination was voluntary.
Subsection 83-175(1) of the ITAA 1997 identifies that a GRP is 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.
Furthermore, paragraph 64 of Tax Ruling TR2009/2 states that:
A payment in lieu of notice can be a genuine redundancy payment provided that such a payment would not be expected on voluntary termination.
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The termination letter and the facts in your employment agreement show that payment in lieu of notice satisfies subsection 83-175(1) of the ITAA 1997, as it is not, expected on voluntary termination that the client will receive a payment in lieu of notice. Unused annual leave Unused annual leave payments, made as a result of genuine redundancy, are considered lump sum payments and are included in your assessable income and is recorded at lump sum A' amount and are taxed at 32% Genuine redundancy payments are tax-free up to a limit worked out under section 83-170 of the ITAA 1997. Subsection 83-170(3) of the ITAA 1997 provides the following formula: Base amount + (Service amount x Years of service) Based on the information provided we are satisfied that the client met all requirements imposed under subsection 83-175(1) of the ITAA 1997. Accordingly, are entitled to a further genuine redundancy payment taking into account the severance pay already included in the tax-free amount. This additional amount was calculated in accordance with formula under subsection 83-170(3) of the ITAA 1997. A portion of payment in lieu of notice satisfies all the conditions in section 83-175 of the ITAA 1997 in respect of the genuine redundancy of this employment, it is not assessable income and is not exempt income and does not have to be included in your client's income tax return. The remainder amount of payment in lieu of notice will be treated as an employment termination payment ETP. Employment termination payment Section 995-1 of the ITAA 1997 states that: employment termination payment has the meaning given by section 82-130 of the ITAA 1997. Subsection 82-130(1) of the 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. Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including: ¢a payment for unused annual leave or unused long service leave; ¢the tax-free part of a genuine redundancy payment or an early retirement scheme payment. Conclusion Your payment in lieu of notice is a genuine redundancy payment as it satisfies all the conditions in section 83-175 of the ITAA 1997.The genuine redundancy amount is a tax-free component that is not included in your assessable income. The remainder amount above the tax-free amount for 2020-21 income year is considered to be an ETP and will be taxed accordingly. |