Edited version of private advice

Authorisation Number: 1051946770413

Date of advice: 28 February 2022

Ruling

Subject: Eligible termination payments

Question 1

Is any part of the lump sum in lieu of redeployment and payment in lieu of Annual Leave for the payment made to you on the termination of your employment considered a genuine redundancy payment under section 83-170 of the Income Tax Assessment Act 1997? (ITAA 1997)

Answer

Yes.

Question 2

Is the portion of a genuine redundancy that is above the relevant year cap amount taxable as an employment termination payment (ETP) under subsection 83-170(3) of ITAA 97

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

The taxpayer was employed by XX

The taxpayer advised that advised their position was being made redundant

The taxpayer advised that they were unable to be redeployed to another position, so they were offered a redundancy package which they accepted.

Upon termination, you were given an amount, broken down as follows:

a.    Payment in lieu of notice

b.    Severance Payment

c.     Accrued Annual Leave & leave loading

d.    Other entitlements as per the taxpayer's employment agreement

Relevant legislative provisions

Income Tax Assessment Act 1997 Sect 83-10

Income Tax Assessment Act 1997 Sect 83-15

Income Tax Assessment Act 1997 Sect 83-170

Income Tax Assessment Act 1997 Sect 83-175

Income Tax Assessment Act 1997 Sect 83-175

Reasons for decision

A payment made to an employee is a genuine redundancy payment if it satisfies all the conditions set out in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997). This section 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 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 the employee reached pension age;

                                     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.

The entitlements listed in the xx Enterprise Agreement:

d.    Clause xx Voluntary redundancy:

                                      i.        xx Where the employee elects voluntary redundancy, they will be entitled to the following payment:

                                     ii.        xx a lump sum payment in lieu of redeployment (26 weeks' pay);

                                    iii.        xx payment in lieu of notice (8 weeks' pay);

                                   iv.        xx severance payment (4 weeks' pay for the first completed year of service and 2 weeks' pay for each additional completed year of continuous service to a maximum of 36 weeks);

                                     v.        xx payment in lieu of accrued annual leave and long service leave that would have been paid during the 26 week redeployment period had it been worked;

                                   vi.        xx payment in lieu of employer superannuation contributions that would have been paid during the 26 week redeployment period had it been worked;

                                  vii.        xx payment in lieu of annual leave and long service leave that would have accrued had the 8 week notice period been worked.

e.    At clause xx, the xx Enterprise Agreement provides that for an employment period of over 3 years and up to the completion of 5 years, you would be entitled to a 3 week period of notice and payment in lieu if that is not given (with you, as an employee over the age of 45 years, an additional week) and no other entitlements where employment is terminated by the employee voluntarily.

f.      As such, the redundancy benefits over and above the provisions and entitlements for normal termination of employment.

The Income Tax Assessment Act 1997 (ITAA97) Section 82-130(1) states the following:

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.

The Income Tax Assessment Act 1997 (ITAA97) Section 83-135 provides the following information:

Payments that are not employment termination payments

(a) a superannuation benefit (see Divisions 301 to 307);

(b) a payment of a pension or an annuity (whether or not the payment is a superannuation benefit); and

(c) an unused annual leave payment (see Subdivision 83-A);

(d) an unused long service leave payment (see Subdivision 83-B);

(e) the part of a genuine redundancy payment or an *early retirement scheme payment worked out under section 83-170(see Subdivision 83-C);

(e): the part of a genuine redundancy payment or an early retirement scheme payment worked out under section 83-170

(f) a payment to which Subdivision 83-D (Foreign termination payments) applies;

(fa) a payment (or part of one) made by a company or trust as mentioned in subsection 152-310(2);

(g) a payment that is an advance or a loan to you on terms and conditions that would apply if you and the payer were dealing at arm's length;

(h) a payment that is deemed to be a dividend under this Act; View history reference

(i) a capital payment for, or in respect of, personal injury to you so far as the payment is reasonable having regard to the nature of the personal injury and its likely effect on your capacity to *derive income from personal exertion (within the meaning of the definition of income derived from personal exertion in subsection 6(1)of the Income Tax Assessment Act 1936 );

(j) a capital payment for, or in respect of, a legally enforceable contract in restraint of trade by you so far as the payment is reasonable having regard to the nature and extent of the restraint;

Notes to this section state the following: For paragraph (e) - the remaining part of a genuine redundancy payment or an early retirement scheme payment (apart from the amount mentioned in the paragraph) is an employment termination payment if section 82-130 applies to that part.

Income Tax Assessment Act 1997 (Cth) subsection 82-130(4) confirms that it is the part calculated as being tax free that is not an eligible termination payment.