Private ruling: Employment termination payment
Date of advice: 25 September 2015
Published: September 2015
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

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 a payment made to you in respect of your termination of employment? | A1: Yes.

Relevant facts and circumstances: In the relevant income year you were terminated from your employment with the Employer on the grounds of redundancy. You were under 65 years old on this date. You were employed by the Employer for over X years. In the subsequent income year the Employer was placed into administration by the Administrator. The Administrator advised employees to apply to a government department for their unpaid entitlements. Within two months of your termination of employment you applied to the government department for your unpaid entitlements. In late 20XX the following entitlements were approved by the government department: Wages $[amount] Annual leave $[amount] Payment in lieu of notice $[amount] Redundancy payment $[amount] Long service leave $[amount] Total $[amount] In late 20XX the Administrator paid you an amount which represents your entitlements paid out from the government department less tax. In late 20XX you applied to the government department for a review of your entitlements. You contended that you were discriminated against due to a certain clause, and therefore entitled to a larger redundancy payment. In the 2015-16 income year the government department approved the review of your entitlements and advanced a payment to the Administrator. In the 2015-16 income year the Administrator paid you the amount mentioned above. No tax was withheld.

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 83-170(2) | Income Tax Assessment Act 1997 section 83-170(3) | Income Tax Assessment Act 1997 section 83-175

Reasons for decision: Summary: The 12 month rule does not apply to the payment made to you in the 2015-16 income year as it relates to a genuine redundancy payment. This amount is not in excess of the tax-free amount of a genuine redundancy payment and no part of the payment is assessable income. | 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). 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, you were made redundant and the payment satisfies the first ETP condition as it was paid in consequence of this 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, there is no question that the termination of employment was due to redundancy. As such, the exemption from the 12 month rule applies to the payment as it relates to a genuine redundancy payment (GRP). Accordingly, the total GRP received by you would include the additional payment and the initial GRP payment received in the previous income year. The initial GRP payment comprises of a redundancy component and a payment in lieu of notice component. Any amount in excess of the tax-free amount of the total GRP is an ETP. | Detailed Reasoning - Tax-free amount of genuine redundancy payment over multiple income years: Subsection 83-170(2) of the ITAA 1997 provides that so much of the GRP 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 x Years of service) For the 2015-16 income year: Base amount is $9,780; Service amount is $4,891; and Years of service is the number of whole years in the period, or sum of periods, of employment to which the payment relates. You were employed for X whole years with the Employer. Hence the 'years of service' to which the GRP relates is X whole years of service. Accordingly, the tax free part of a GRP you can receive in the 2015-16 income year under subsection 83-175(3) of the ITAA 1997 is: $9,780 + ($4,891 × X) However, according to Taxation Ruling 2009/2, the tax-free part of a GRP is reduced by a GRP received in a previous income year relating to the same redundancy. This ensures that the tax-free amount of a GRP can only be claimed once for any given termination of employment because of redundancy. As the payment in the 2015-16 income year is below the tax-free amount of a GRP, the entire amount of the payment is tax-free. This tax-free amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997. Consequently the amount you received in the 2015-16 income year is not required to be included in your income tax return for that year.