Private ruling: Genuine redundancy
Published: July 2012
Ruling period: 1 July 2012 to 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is any part of the payment to be received on termination of employment excluded from assessable income as the tax-free part of a genuine redundancy payment? Advice/Answers: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-130. | Income Tax Assessment Act 1997 Section 82-135. | Income Tax Assessment Act 1997 Section 83-175. | Income Tax Assessment Act 1997 Section 82-10(3)(b). | Income Tax Assessment Act 1997 Section 82-140 | Income Tax Assessment Act 1997 Section 82-145 | Income Tax Assessment Act 1997 Section 82-150 | Income Tax Assessment Act 1997 Section 82-155 | Income Tax Assessment Act 1997 Section 83-170.

Reasons for decision: Summary: As you will be over 65 years of age at the time of your termination of employment, the termination is not a genuine redundancy. Therefore no part of the payment to be received on termination of employment is excluded from your assessable income as the tax-free part of a genuine redundancy payment | Detailed Reasoning - Detailed reasoning: Employment termination payment A payment made to an employee is an employment termination payment 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: A payment is an employment termination payment if: · it is received by you: · in consequence of the termination of your employment; or · after another person's death, in consequence of the termination of the other person's employment; and · it is received no later than 12 months after the termination (but see subsection (4)); and · it is not a payment mentioned in section 82-135. Payment is made in consequence of the termination of employment The first condition to be met is that there must be an employment termination payment that is made in consequence of the termination of employment of the taxpayer. The phrase 'in consequence of' is not defined in the ITAA 1997. However, the Commissioner has issued Taxation Ruling TR 2003/13 which discusses the meaning of the phrase which has also been interpreted by the courts in several cases. Essentially, if the payment follows as an effect or a result from the termination of employment, the payment will be made 'in consequence of' the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. Hence the payment will be an employment termination payment unless the payment is specifically excluded under section 82-135. You were employed by the Company as a senior officer. Your employment ceased in the 2011-2012 income year and you received various payments. Included in these payments was an employment termination payment amount (the payment), which is the subject of the ruling. The payment has been classified as an employment termination payment by the employer in a letter. Therefore it is evident that the payment was made in consequence of your termination of employment. The payment would not have been made had there been no termination of employment. The termination of employment and the payment are intertwined and connected. Therefore the requirement of subparagraph 82-130(1)(a) of the ITAA 1997 has been met. The payment is received no later than 12 months after termination of employment The second condition for the payment to meet the criteria, as an employment termination payment is stated under paragraph 82-130(1)(b) of the ITAA 1997, is that the employment termination payment was paid to the taxpayer no later than 12 months after their employment was terminated. You terminated your employment in the 2011-2012 income year and if the employment termination payment is paid within 12 months of this date it will be made within 12 months after termination of employment. Therefore the requirement under paragraph 82-130(1)(b) of the ITAA 1997 will be met. Payments excluded from being employment termination payments Paragraph 82-130(1)(c) of the ITAA 1997 requires that an employment termination payment is not a payment under section 82-135 of the ITAA 1997. Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including: · an unused annual leave payment; · an unused long service leave payment; or · the tax-free part of a genuine redundancy payment or an early retirement scheme payment. Clearly the payment is not for unused annual leave or unused long service leave, or any of the other payments, with the possible exception of genuine redundancy payments. We will now consider if any portion of the payment is the tax-free part of a genuine redundancy payment. | Detailed Reasoning - Genuine redundancy payment: A payment is a genuine redundancy payment (GRP) if it satisfies all criteria set out in section 83-175 of the ITAA 1997. The first criteria to be satisfied (subsection 83-175(1) of the ITAA 1997) is: · that the payment is received by an employee who is dismissed from employment because the employee's position is genuinely redundant; and · that the payment 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 the dismissal. Subsection 83-175(2) of the ITAA 1997 requires that all of the following conditions must be met: The employee is dismissed before the earlier of: · the day he or she turned 65; or · 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 that age or complete the period of service (as applicable). If the dismissal was not at arms length the payment must not exceed the amount that could reasonably be expected to be made if the dismissal was at arms length. 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 the dismissal. Subsection 83-175(3) of the ITAA 1997 imposes a further condition that the 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 of the payment or at a later time. Termination occurred before age 65 or expiration of fixed term The second condition listed above is that the termination time was a date before the taxpayer attained age 65 or such earlier date on which his or her employment would have necessarily terminated under the terms of employment because of the employee attaining a certain age or completing a certain period of service. As you are already over 65 years of age your employment cannot be terminated before age 65, therefore this condition is not satisfied. As one of the conditions has not been satisfied, the payment cannot be a GRP. Therefore we do not need to consider the other conditions. Tax Treatment of the employment termination payment An employment termination payment made after 1 July 2007 will be comprised of the following components: · Tax free component - this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and · Taxable component - the amount remaining after deducting the tax free component from the total payment. The tax free component is not assessable income and is not exempt income. The taxable component is included, in full, as assessable income. You have been with this employer for less than 20 years. Therefore, there will not be any pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997. As the payment is not made because you ceased being gainfully employed as a result of suffering from ill-health, there is no invalidity segment for the purposes of section 82-150 of the ITAA 1997. Consequently, the employment termination payment will not contain a tax free component and will be comprised entirely of a taxable component (section 82-145 of the ITAA 1997). The taxable component is subject to tax, depending on the person's age when the payment is received. For recipients above preservation age, the taxable component of an employment termination payment is taxed at no more than 15%, for amounts below the employment termination payments cap ($175,000 for the 2012-13 income year) and at the top marginal rate for amounts above the cap (section 82-10 of the ITAA 1997). Medicare levy of 1.5% is added to the tax rate that applies. Preservation age is the age at which retirees can access their superannuation benefits. For a person born before 1 July 1960, their preservation age is 55. | Detailed Reasoning - Conclusion: In your case, because: · you will be over your preservation age on the last day of the income year in which the payment will be made, and · the employment termination payment you are receiving does not exceed the employment termination payments cap, · you will be taxed at no more than 15%, plus Medicare levy on the employment termination payment.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You are over 65 years of age. | You are an employee of a company (the employer) and you have been employed with them for less than 20 years. | The employer recently announced voluntary redundancy packages for its employees. | You lodged an expression of interest (EOI) with the employer for the voluntary redundancy package. | You received an acknowledgement to your EOI along with an estimation of the payments you would receive with the effective termination date being around the end of the 2011-12 income year. | Further, you were advised by the employer that the redundancy is not a genuine redundancy because the final decision to accept a package and leave the employer is made by the employee.