Edited version of private advice

Authorisation Number: 1052076620758

Date of advice: 17 January 2023

Ruling

Subject:Genuine redundancy payment

Question

Is any part of the payment in lieu of notice a genuine redundancy under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, the total payment in lieu of notice represents a genuine redundancy payment.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your date of birth is in XXXX.

You provided a copy of your employment contact dated mid 20XX that shows you entered into an employment contract with the employer. It was not a fixed term contract.

You were employed as a designer mid 20XX to late 20XX. Your employment with the employer therefore was for more than 2 years but less than 3 years.

In late 20XX the employer provided you with a termination letter stating due to changes in operational requirements the business will no longer require the job currently done by you accordingly your position will be made redundant in late 20XX. Your notice period was noted as 4 weeks and your redundancy pay as 6 weeks.

The copy of your employment contract you provided set out your salary, commencement date and position.

A clause in your employment contract states that the employer can terminate this agreement by providing one month's notice in writing.

Another clause states your redundancy entitlements are as set out in the National Employment Standards under the Fair Work Act 2009 (Cth). In accordance with these guidelines for a period of continuous service of more than 2 years but less than 3 years (your service based on your commencement date and termination date) you are entitled to redundancy pay of 6 weeks.

You have provided a copy of a payslip noting the payments made to you.

There is no relationship between you and the employer.

There was no arrangement between you and the employer, or between the employer and another person, to employ you after the termination of your employment.

You have not returned to work for the employer in any capacity subsequent to the termination of your employment.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83-135.

Income Tax Assessment Act 1997 section 83-170.

Income Tax Assessment Act 1997 section 83-175.

Other relevant documents

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

Reasons for decision

Summary

Your payment in lieu of notice is a genuine redundancy payment. As the payment is below the tax-free amount of a genuine redundancy payment, the entire amount is non-assessable, non-exempt income.

Detailed reasoning

Genuine redundancy payment

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 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 employees' position is genuinely redundant and 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 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 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)).

Section 82-135 of the ITAA 1997 includes (among others):

•                     superannuation benefits.

•                     the payment of a pension or annuity.

•                     unused annual leave (paragraph 82-135(c)) or long service leave payments (paragraph 82-135(d)).

Whether the payment in lieu of notice you received will constitute a genuine redundancy payment will be addressed below.

In order to satisfy the definition of a genuine redundancy payment under subsection 83-175(1) of the ITAA 1997 there must be a dismissal from employment and the dismissal must result from the positions being made genuinely redundant.

The term dismissal is not defined in the ITAA 1997. Therefore, it is necessary to consider the common law or ordinary meaning of the term and the meaning the judicial authorities have ascribed to it.

Dismissal from employment

Taxation Ruling TR 2009/2, titled Income Tax: genuine redundancy payments, which outlines the Commissioners view of the requirements for a payment to qualify as a genuine redundancy payment under section 83-175 of the ITAA 1992, discusses what constitutes a 'dismissal'. In particular:

18. Dismissal is a particular mode of employment termination. It requires a decision to terminate employment at the employer's initiative without the consent of the employee. This stands in contrast to employment that is terminated at the initiative of the employee, for example in the case of resignation.

In your case, the employer provided you with a termination letter stating due to changes in operational requirements the business will no longer require the job currently done by you accordingly your position was made redundant.

It is concluded that the termination of your employment constitutes a dismissal for the purposes of subsection 83-175(1) of the ITAA 1997.

The remaining conditions under section 83-175 of the ITAA 1997 are satisfied as:

•         your position was made redundant

•         the payment in lieu of notice exceeds what you would have received had you voluntarily resigned outside the redeployment process

•         you are below pension age

•         there was no arrangement between you and the employer or between the employer and another person, to employ you following the termination of your employment, and

•         no amount was received by you in lieu of superannuation.

Tax-free amount of a genuine redundancy payment

Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is non-assessable, non-exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment. The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

For the 20XX-XX income year:

Base amount is $XXXX;

Service amount is $XXXX; and

Years of service is the number of whole years in the period, or sum of periods, of employment to which the payment relates.

Accordingly, the tax-free part of a genuine redundancy payment you can receive in the 20XX-XX income is:

$XXXX + ($XXXX × X) = $XXXX

As a result of your termination, you also received a severance payment which was treated as a genuine redundancy payment.

As the payment in lieu of notice is also a genuine redundancy payment and your total genuine redundancy payment remains below the tax-free amount of a genuine redundancy payment, the entire amount of the payment in lieu of notice is the tax-free part of a genuine redundancy payment. This tax-free amount is non-assessable, non-exempt income under subsection 83-170(2) of the ITAA 1997.