Private ruling: Genuine redundancy payment.
Published: November 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is any part of the redundancy payment the tax-free part of a genuine redundancy payment? | A1: Yes

Relevant facts and circumstances: You commenced employment with the Employer during the relevant income year. In the subsequent income year the Employer advised you in a letter that: a) your position would no longer exist; b) you had two weeks' notice; c) your employment , due to the notice period, would end during the 20XX income year; d) you would not be required work out the notice period end date or work beyond the end of subsequent income year; and e) you would be entitled to a redundancy payment. A breakdown of your entitlements was outlined on the Employee Separation Certificate (the Certificate). Copies of your PAYG payment summary and Payroll Advice have been provided which show that the amounts shown on the Certificate were paid to you in the subsequent income year. According to your employment contract, you would not have been entitled to the redundancy payment had you voluntarily resigned. None of the payments you received are 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 section 82-135. | Income Tax Assessment Act 1997 paragraph 82-135(c). | Income Tax Assessment Act 1997 paragraph 82-135(e). | Income Tax Assessment Act 1997 section 83-10. | 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 sum of the payment in lieu of notice and the redundancy payment is considered a genuine redundancy payment. As this payment does not exceed the calculated tax-free amount, the whole amount of this payment is non-assessable and non-exempt income. Accordingly, it is not to be included in your income tax return for the subsequent income year. | Detailed Reasoning - Genuine redundancy: A payment made to an employee is a genuine redundancy payment (GRP) 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 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 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)). Subsection 82-135 of the ITAA 1997 includes (among others): _ superannuation benefits; _ the payment of a pension or annuity; and _ unused annual leave (paragraph 82-135(c)) or long service leave payments (paragraph 82-135(d)). In view of the above, the payment you received for unused annual leave is not a genuine redundancy payment pursuant to subsection 82-135(4) of the ITAA 1997. The redundancy payment and payment in lieu of notice is addressed below. The Employer advised that you are entitled to a redundancy payment and payment in lieu of notice. The facts show that your employment with the Employer ceased at the end of the subsequent income year as, in a letter, the Employer stated you were not required to work out the notice period or attend work beyond the end of the subsequent income year. Further, the facts show that your employment was terminated because your position is genuinely redundant and that you would not receive any redundancy payment had you voluntarily resigned. Accordingly, subsection 83-175(1) of the ITAA 1997 has been satisfied. The three conditions pertaining to subsection 83-175(2) of the ITAA 1997 have been satisfied as: • You will be dismissed before reaching 65 years of age; • The dismissal is at arm's length; and • There is nothing to indicate that there will be an arrangement between yourself 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, requires 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. As none of the payments was for payment in lieu of superannuation, this requirement is satisfied. Lastly, the redundancy payment is not excluded from the definition of a GRP. Accordingly, subsection 83-175(4) of the ITAA 1997 has been satisfied. As all the conditions under section 83-175 of the ITAA 1997 are satisfied, it is accepted that the redundancy payment and payment in lieu of notice 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) of the ITAA 1997 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 2013-14 income year: Base amount means $9,246; Service amount means $4,624; and Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates. After applying the calculations, the payment you received for redundancy payment and in lieu of notice is below the tax-free amount of a genuine redundancy payment. As a result, the entire amount of the payment is the tax-free part of a genuine redundancy payment. This tax-free amount is non-assessable and non-exempt income under subsection 83-170(2) of the ITAA 1997. Consequently the amount of is not required to be included in your income tax return for the subsequent income year.