Private ruling: Employment termination payment
Published: September 2012
Ruling period: 2011-12 income year.
Date scheme commenced: 1 July 2011

Ruling: Q1: Does the 12 month rule apply in respect of the payment made from the General Employee Entitlements and Redundancy Scheme (GEERS)? | A1: No. | Q2: Is any part of the payment received from GEERS a genuine redundancy payment? | A2: Yes.

Relevant facts and circumstances: You are over 55 years of age. You commenced employment with the Employer in the early 1990s. The Employer subsequently went into liquidation and the Liquidator was appointed as the liquidator. As a result of the liquidation, your employment was terminated in the 2007-08 income year. The Liquidator had previously made a claim for your employee entitlements under the General Employee Entitlements and Redundancy Scheme (GEERS) administered by the Department of Education, Employment and Workplace Relations (DEEWR). In the 2008-09 income year you were advised by the Liquidator that the claim had been unsuccessful. You subsequently lodged an appeal to review the decision by DEEWR regarding your eligibility for assistance under GEERS in relation to your employment with the Employer. Your appeal was approved in the 2011-12 income year and a payment was made to you. A letter from GEERS in relation to your appeal, stated a decision had been made about your GEERS claim and advised the amount of the payment (before tax) that was determined that you were eligible to receive. Included in the letter was a copy of your GEERS Assessment Report which provided a breakdown of the GEERS assistance you were entitled to receive. The GEERS assistance was broken down into the following payments showing the amount of each payment, the total tax deducted and the total net payment after tax: · Annual leave · Payment in lieu of notice · Redundancy · Long service leave · The liquidator has withheld an amount from the payment as tax. · The liquidator issued two payment summaries as follows: · PAYG payment summary - Employment termination payment · Taxable component · Total tax withheld · PAYG payment summary - Individual non-business · Gross payments label A · Total tax withheld You state that had you voluntarily resigned on the date of the termination of your employment, you would have only been entitled to the payment of accrued long service leave and annual leave. You were dismissed before you reached 65 years of age. You state that none of the payments received were for payment in lieu of superannuation. At the time of dismissal there was no arrangement between you and the Employer or between the Employer and another person, to employ you after the dismissal.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-130. | Income Tax Assessment Act 1997 Subsection 82-130(4). | Income Tax Assessment Act 1997 Section 82-135. | Income Tax Assessment Act 1997 Paragraph 82-135(c). | Income Tax Assessment Act 1997 Paragraph 82-135(d). | Income Tax Assessment Act 1997 Paragraph 82-135(e). | Income Tax Assessment Act 1997 Section 83-10. | Income Tax Assessment Act 1997 Section 83-15. | Income Tax Assessment Act 1997 Section 83-80. | Income Tax Assessment Act 1997 Section 83-85. | Income Tax Assessment Act 1997 Section 83-170. | Income Tax Assessment Act 1997 Subsection 83-170(2). | Income Tax Assessment Act 1997 Subsection 83-170(3). | Income Tax Assessment Act 1997 Section 83-175. | Income Tax Assessment Act 1997 Subsection 83-175(1). | Income Tax Assessment Act 1997 Subsection 83-175(2). | Income Tax Assessment Act 1997 Subsection 83-175(3). | Income Tax Assessment Act 1997 Subsection 83-175(4).

Reasons for decision: Summary: The part of the payment representing payment in lieu of notice and redundancy is a genuine redundancy payment. The amount of the payment that is less than your tax-free amount, in respect of the genuine redundancy of this employment, is not assessable income and is not exempt income. The 12 month rule that applies to employment termination payment does not apply to the tax-free part of a genuine redundancy payment. | Detailed Reasoning - Genuine redundancy payment: A payment made to an employee is a genuine redundancy payment if it satisfies all the criteria set out in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997). Under subsection 83-175(1) of the ITAA 1997, four criteria must be satisfied: · The payment must be received in consequence of a 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. · You were employed by the Employer. The Employer subsequently went into liquidation. As noted in the facts, in a letter in relation to your appeal, GEERS advised that you are eligible for a gross payment of a specified amount after the Employer was placed in liquidation. Your employer had ceased trading and your position ceased to exist. The decision to terminate your employment was made without your consent. Therefore, it is considered that the payment made to you was made in consequence of the termination of your employment. The termination of employment and the payment are all intertwined and connected. If not for the termination of employment, the payment would not have been made. Further, it is considered that you had been dismissed from your employment because your role with the Employer has been made genuinely redundant. Therefore, subsection 83-175(1) of the ITAA 1997 has been satisfied. | Detailed Reasoning - Further conditions for a genuine redundancy payment: Subsection 83-175(2) of the ITAA 1997 sets out further criteria that must be satisfied for a payment to be regarded as a genuine redundancy payment. The first condition requires that the taxpayer is dismissed before the earlier of the day the taxpayer turns 65 or the day they reach a particular age or completed a particular period of service that would have terminated the taxpayer's employment. This condition is satisfied as you were dismissed before you were 65 years of age. The second condition requires that if the dismissal were not at arm's length, that the payment does not exceed the amount that could be reasonably expected to be made if the dismissal were at arm's length. This condition does not apply as the dismissal was made at arm's length. The third condition is that at the time of 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. This condition is satisfied as, at the time of dismissal there was no arrangement (written, verbal or implied) between you and the Employer or between the Employer and another person, to employ you after the dismissal. A further requirement, as set out in subsection 83-175(3) of the ITAA 1997, is that no part of the payment 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 date. In this case, this condition is satisfied as no part of the payment was received by you in lieu of superannuation benefits. Not a payment mentioned in section 82-135 of the ITAA 1997 Subsection 83-175(4) of the ITAA 1997 provides that 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 includes (among others): · superannuation benefits; · the payment of a pension or annuity; and · unused annual leave or long service leave payments. In this case part of the payment is excluded from being a genuine redundancy payment as it represents amounts mentioned in section 82-135 of the ITAA 1997 (apart from paragraph 82-135(e)). The amounts excluded are: · unused annual leave (paragraph 82-135(c)) and · unused long service leave (paragraph 82-135(d)). The remaining amount represents a payment for redundancy and a payment in lieu of notice. It is accepted that the remaining amount is a genuine redundancy payment. | Detailed Reasoning - Tax-free amount: 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 not assessable income and is not 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 2011-12 income year: Base amount means $8,435; Service amount means $4,218; and Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates. | Detailed Reasoning - Exception from 12 month rule: Subsection 82-130(4) of the ITAA 1997 specifically excludes payments that are genuine redundancy payments or early retirement scheme payments from the 12 month rule. Since this amount is a genuine redundancy payment, it is exempt from the 12 month rule. | Detailed Reasoning - Taxation treatment of unused annual leave and unused long service payments: Unused annual leave would ordinarily be included in assessable income under section 83-10 of the ITAA 1997 and subject to marginal rates of tax. However, as this payment was made in connection to a genuine redundancy payment, section 83-15 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%. Similarly, unused long service leave would ordinarily be included in assessable income under section 83-80 of the ITAA 1997. However, as this payment was made in connection to a genuine redundancy payment, section 83-85 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%.

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