Private ruling: employment termination payments
Published: February 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Does the exemption from the 12 month rule under paragraph 82-130(4)(b) of the Income Tax Assessment Act 1997 apply to additional payments made by a liquidator to former employees of a company in liquidation? | A1: Yes

Relevant facts and circumstances: In the 2013-14 income year the company was placed into administration, and subsequently was placed into liquidation. On a date in the 2013-14 income year the company ceased trading and all its employees were terminated on that day. In the 2013-14 income year, a meeting of creditors resolved that the company be wound up. The liquidator was not in receipt of sufficient funds to meet employee entitlements in full and accordingly directed eligible employees to lodge a claim under a government scheme (the Scheme). The liquidator advised that the eligible employees received a distribution of their outstanding entitlements from the Scheme. These distributions included payment of a genuine redundancy payment. Sufficient funds in the administration were subsequently received. During, or after, the 2014-15 income year some of the company's employees may be paid an additional amount in respect of their genuine redundancy payments.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 82-130 | Income Tax Assessment Act 1997 subsection 82-130(1) | Income Tax Assessment Act 1997 paragraph 82-130(1)(b) | Income Tax Assessment Act 1997 paragraph 82-130(4)(b) | Income Tax Assessment Act 1997 section 82-135 | Income Tax Assessment Act 1997 section 83-170 | Income Tax Assessment Act 1997 section 83-175

Reasons for decision: Summary: The 12 month rule does not apply to the additional payments to be made to the employees as they relate to genuine redundancy payments. Accordingly, any amount in excess of the tax-free amount of an employee's total genuine redundancy payment is an employment termination payment (ETP). | Detailed Reasoning - Employment termination payments: A payment is an ETP if the payment satisfies all the requirements in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997) and is not specifically excluded under section 82-135. Subsection 82-130(1) of the ITAA 1997 states that: 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. In this case, the facts show that the additional payments that will be made to the employees dismissed from the company in the 2013-14 income year, when the company was placed into liquidation, satisfy the first ETP condition as they are paid in connection with their termination of employment. | Detailed Reasoning - Payment received more than 12 months after termination: In addition to meeting the other conditions for a payment to be an ETP, paragraph 82-130(1)(b) of the ITAA 1997 specifies that a payment must be received within 12 months of the termination of employment, unless subsection 82-130(4) of the ITAA 1997 applies to allow the exemption from the 12 month rule. Subsection 82-130(4) of the ITAA 1997 states: Paragraph (1)(b) does not apply to you if: (a) you are covered by a determination under subsection (5) or (7); or (b) the payment is a genuine redundancy payment or an early retirement scheme payment. In this case the exemption from the 12 month rule applies to the additional payments as they are in relation to the employees' genuine redundancy payments (GRPs) Accordingly, the total GRPs received by the employees would include the additional payments and the initial GRP payments received by them in the previous income year. Therefore any amount in excess of the tax-free amount of an employee's total GRP is an ETP. | Detailed Reasoning - Tax-free amount of genuine redundancy payment over multiple income years: The tax-free amount of a GRP is calculated under section 83-170 of the ITAA 1997. In cases where any GRP is made as payments over more than one income year, as is also the case where a GRP is made as a payment in only one income year, the payments are required to be brought to account in the year that they are received. This requires that all payments made in consequence of the dismissal up to and including the time of the payment in question are assessed against a single voluntary termination element worked out at the time of the dismissal. Similarly, the tax-free amount of a GRP can only be claimed once for any given termination of employment because of redundancy. This is exemplified within Taxation Ruling 2009/2, specifically example 21, which demonstrates how GRPs are treated for taxation purposes when received over more than one income year. | Detailed Reasoning - Conclusion: The additional payments are made in relation to GRPs, hence the 12 month rule does not apply. Therefore, any amount in excess of the tax-free amount of an employee's total GRP is an ETP.