Edited version of private advice

Authorisation Number: 1051919944398

Date of advice: 10 November 2021

Ruling

Subject: Employment termination and genuine redundancy payment.

Question 1

Is a part of the payment in lieu of notice an employment termination payment (ETP) under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. See reasons for decision.

Question 2

Is a part of the payment in lieu of notice a genuine redundancy payment under section 83-175 of the ITAA 1997?

Answer

Yes. See reasons for decision

This ruling applies for the following period:

Financial year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

•                 You were employed by your Employer until your employment was terminated when you were made redundant.

•                 Your Employer issued you a letter advising you that your position is no longer required and that for this reason your employment will be terminated by reason of redundancy on the same date. As part of this termination your Employer paid you:

o       Payment in lieu of notice;

o       Severance pay; and

o       Payment of your accrued annual and/or long service leave

•                 Your Employer issued you with an employment separation certificate that identifies the relevant components of your lump sum payment and their taxation.

•                 You applied for a private ruling requesting for the payment in lieu of notice to be treated as a tax-free redundancy payment instead of an ETP. You don't disagree with the tax treatment that was applied to the other components of this lump sum.

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 82-140

Income Tax Assessment Act 1997 subsection 83-175(1)

Detailed reasoning

1.               An ETP under section 82-130 of the ITAA 1997 is a payment received by you:

•                 in consequence of termination of your employment;

•                 it is received no later than 12 months after that termination; and

•                 it is not a payment mentioned in section 82-135 of the ITAA 1997

2.               In your case, your payment in lieu of notice was made in connection with the termination of your employment. The payment was made to you within 12 months of termination of your employment.

3.               Therefore, this payment would be ordinarily and ETP unless this payment or part of this payment is specifically excluded under section 82-135 of the ITAA 1997 (thereby not satisfying paragraph 82-130(1)(c) of the ITAA 1997).

4.               Section 82-135 of the ITAA 1997 provides that certain payments are not employer termination payments. Paragraph 82-135(c) of the ITAA 1997 excludes from ETP the part of a genuine redundancy payment worked out under section 83-170 of the ITAA 1997.

5.               You contend that the whole payment received in lieu of notice, should be fully treated as a tax-free redundancy payment under paragraph 64 of Taxation Ruling TR 2009/2: Income tax: genuine redundancy payments which states (emphasis added):

'64. A payment in lieu of notice can be a genuine redundancy payment provided that such a payment would not be expected on voluntary termination.'

Genuine redundancy payments

6.               Subsection 83-175(1) of the ITAA 1997 provides basic requirement for genuine redundancy.

7.               TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2), outlines the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy under section 83-175 of the ITAA 1997.

8.               Paragraph 11 of TR 2009/2 states:

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.

9.               Paragraph 33 of the TR 2009/2 states that in addition to the basic requirements found in subsection 83-175(1) of the ITAA 1997 there are further conditions for genuine redundancy payment treatment listed in subsections 83-175(2) and (3) of the ITAA 1997. These are:

•                 the dismissed employee is not older than specified age limits (paragraphs 34 and 35 of this Ruling)

•                 the termination is not at the end of a fixed period of employment (paragraphs 36 to 39 of this Ruling)

•                 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 (paragraphs 40 to 49 of this Ruling)

•                 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 (paragraphs 50 to 52 of this Ruling); and

•                 the payment is not in lieu of superannuation benefits (paragraphs 53 and 54 of this Ruling).

10.            We are satisfied that your employment was terminated because of the redundancy of your position. For that reason, we are required to determine how much of the payment in lieu of notice represents a tax-free amount.

11.            Paragraph 55 of the TR 2009/2 states that if each of the conditions (that is, the basic and further requirements) for genuine redundancy payment treatment are satisfied, the following steps are taken to work out the tax treatment of the payments that are consequently made:

Step 1

•                 Identify and exclude any amounts that are subject to a more specific tax treatment than employment termination payments or genuine redundancy payments.

•                 A full list of such payments is set out in section 82-135. These payments include: superannuation benefits; pensions or annuities; unused annual leave payments; unused long service leave payments; and foreign termination payments.

Step 2

•                 Determine the extent to which the remaining amounts (some or all) may be genuine redundancy payments.

•                 To do this, deduct the amount that could reasonably be expected if the employee had voluntarily terminated their employment.

Step 3

•        Apply section 83-170 to work out the extent to which any genuine redundancy payment so identified is tax-free.

Step 4

•                 After going through this process there are two possible remaining amounts. One is any assessable part of the genuine redundancy payment in excess of the tax-free amount. The other is the amount that could reasonably be expected on voluntary termination. These amounts are generally treated as employment termination payments.

12.            As pointed out by you, paragraph 64 of the TR 2009/2 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.'

13.            Your employment contract specifies the period in lieu of notice that you would receive if you were to terminate your employment voluntarily or if your employer terminated your employment without notice or outside redundancy.

14.            Based on the terms of this contract we were able to establish the taxable and tax-free part of your payment in lieu of notice.