Private ruling: Genuine redundancy
Published: July 2012
Ruling period: 1 July 2010 to 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is the lump sum payment of $X received on the termination of employment a genuine redundancy payment? Advice/Answer: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 82-10(3). | 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 Subsection 82-130(2). | Income Tax Assessment Act 1997 Section 82-135 | Income Tax Assessment Act 1997 Paragraph 82-135(e) | Income Tax Assessment Act 1997 Section 82-170 | Income Tax Assessment Act 1997 Subsection 82-170(2) | Income Tax Assessment Act 1997 Subsection 82-170(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 Paragraph 83-75(2)(a) | Income Tax Assessment Act 1997 Paragraph 83-75(2)(b) | Income Tax Assessment Act 1997 Paragraph 83-75(2)(c) | Income Tax Assessment Act 1997 Subsection 83-175(3) | Income Tax Assessment Act 1997 Subsection 83-175(4)

Reasons for decision: Summary: The lump sum payment of $X received is a payment made in consequence of the termination of your employment because of a genuine redundancy. The lump sum payment is a genuine redundancy payment and consists of a tax-free amount of $A which is not assessable income and is not exempt income. The balance of $B is assessable income and subject to tax as an employment termination payment. You are entitled to a tax offset that ensures the rate of income tax on the amount is not more than 30%. | Detailed Reasoning - Employment termination payment: A payment made to an employee is an employment termination payment (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) states: 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 the termination (but see subsection (4)); and (c) it is not a payment mentioned in section 82-135. Based on the information provided, the lump sum payment of $X was made to you in consequence of the termination of your employment because there is a nexus between the termination of your employment and the lump sum payment for in lieu of notice (six months salary) made to you.This is in accordance with the Commissioner's view in Taxation Ruling 2003/13 (TR 2003/13) and subparagraph 82-130(1)(a)(i) of the ITAA 1997. In other words, you would not otherwise receive the payment except for the termination of your employment. Consequently, as the payment was made in consequence of the termination of employment, it is an ETP as defined in subparagraph 82-130(1)(a)(i) of the ITAA 1997. | Detailed Reasoning - Genuine redundancy payment: Section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the criteria to be met in order for a payment to be considered a genuine redundancy payment. Section 83-170 applies to treat so much of the relevant payment (that does not exceed the amount worked out under a specified formula) as tax-free. That is, the tax-free part is not assessable income and is not exempt income. Under subsection 83-175(1), one of the criteria to be met is that the payment is 'received by an employee who is dismissed from employment' because the employee's position is genuinely redundant. In Taxation Ruling 2009/2 Income tax: genuine redundancy payments , the Commissioner has outlined the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy payment under section 83-175 of the ITAA 1997. There are four necessary components within this termination requirement: · The payment being tested must be received in consequence of an employee's termination. · That termination must involve the 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. | Detailed Reasoning - Component 1: Payment being tested must be received in consequence of an employee's termination.: It has been established previously that the lump sum payment of $X has been received in consequence of the termination of your employment with the Entity, therefore the requirement of the first component of subsection 83-175(1) of the ITAA 1997 has been satisfied. | Detailed Reasoning - Component 2: That termination must involve the employee being dismissed from employment.: On the basis of the facts as presented in your case, it is considered you were dismissed from employment at the initiative of your employer (the Entity). Therefore, this second component of subsection 83-175(1) of the ITAA 1997 has been satisfied. | Detailed Reasoning - Component 3: That dismissal must be caused by the redundancy of the employee's position.: You were terminated from your position in 20XX. The Email dated in 20XX from the Entity advised staff that the team under your position and the team under the other general manager (also a terminated position), were both to report to another person in the short term as the two managers were no longer with the Entity. The Email dated in 20XX advised staff that later in 20XX a temporary contractor will join the Entity on a six month contract in the new position. The contractor's responsibilities would also include three other teams reporting to this contractor as well as the teams of the two managers who had been terminated. The contractor's time was to be split between the Entity's three offices which were located in two different states. You stated the administrators came in 20XX. This was only four months into the six month temporary period and the Entity went into administration in 20XX. Therefore, based on the information provided, it can be concluded that your employer made the ultimate decision that your position was redundant and that was the prevailing reason you were dismissed from your employment in 20XX. | Detailed Reasoning - Component 4: The redundancy payment must be made genuinely because of a redundancy.: It is considered the condition for this fourth component has been satisfied as: · the dismissed employee is not older than specified age limits; · the termination is not at the end of a fixed period of employment; · the actual amount that was paid is not greater than the amount that could reasonably be expected to be paid had the parties been dealing at arm's length; · the amount that was paid was in excess of what you would have been entitled to receive if you had voluntarily resigned; · there is no arrangement to employ the dismissed employee after the termination; and · the payment is not in lieu of superannuation benefits. On the basis of the information provided, it is also considered the conditions of subsections 83-175(2) and 83-175(3) are also satisfied. Consequently, it can be concluded that the lump sum payment of $X, is a genuine redundancy payment as defined in section 83-175 of the ITAA 1997. | Detailed Reasoning - Taxation of a genuine redundancy payment: 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) Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates. For the 2010-11 income year: Base amount means $8,126; and Service amount means $4,064. Your employment commenced in 200X and ceased in 20XX. Hence the 'years of service' to which the genuine redundancy payment relates is Y whole years of service. Accordingly, the tax-free part of a genuine redundancy payment you can receive in the 2010-11 income year is $A. This tax-free amount is not assessable income and is not exempt income in accordance with subsection 83-170(2) of the ITAA 1997. The balance of $B ($X less $A) is assessable income and subject to tax as an ETP. You are entitled to a tax offset that ensures the rate of income tax on the amount is not more than 30%. This is in accordance with subsection 82-(10)(3) of the ITAA 1997 as you were age under 55 on the last day of the income year in which you received the payment. The PAYG payment summary- employment termination payment for the year ended 30 June 2011 should therefore consist of the taxable component of $B and the tax free component of $A. With regard to the PAYG payment summary for the year ended 30 June 2011 in relation to amounts of salary or wages and other payments, the tax free amount of $A should be shown as a Lump sum D amount and the lump sum amount for unused annual leave should be shown as a Lump sum A amount.

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 were under age 55 on 30 June 2011. | You were appointed Group Manager of an entity (the Entity). | You provided a copy of the letter of appointment which specified: | · The commencement of your appointment. | · The notice period was specified as "one month's notice is to be given by either party to terminate this employment contract". | Payment in lieu of notice may be made at the discretion of the Entity. In the case of serious misconduct, the Entity reserves the right to terminate this employment contract without notice. | In 20XX, your employment with the Entity was terminated. | Your received a termination statement which showed an in lieu of notice payment of $X (six months salary) as an employment termination payment (ETP) which was taxed at 31.5%. | The above details are consistent with the PAYG payment summary - employment termination payment for year ending 30 June 2011 which included the following details: | You stated the administrators came to the Entity in 20XX. | The Entity went into voluntary administration in 20XX. | You state the following in relation to why you believe your termination of employment should be treated as a genuine redundancy: | You believe there is sufficient evidence to prove that your termination was not because of your performance but was due to cost cuttings by the Entity. | The Entity's directors had been considering the merging of various roles and one of those roles that was terminated was your position. | You believe your position ceased to exist on your termination date. | Since the termination, at no time was any person in your position with the only evidence being that a temporary contractor was engaged for a period of six months to perform various responsibilities including those of your position and that of another general manager of the Entity - this was a new position which did not exist previously. | You contend that your termination was in fact a genuine redundancy payment as the job that you were employed to do in your position ceased to exist when you were made redundant on your termination date. | You sought legal advice and as the Entity became insolvent, you decided not to continue pursuing the matter. | You provided copies of supporting email documentation as follows: | · Email where the Entity advised staff that the two managers (yourself and the other general manager) were no longer with the Entity. Both teams of the two managers were to report to another person in the short term and until further arrangements were made, | · Email advising staff that, a temporary contractor will join the Entity on a six month contract in the new position. The contractor's responsibilities would also include three other teams reporting to this contractor as well as the teams of the two managers who had been terminated. The contractor's time was to be split between the Entity's three offices which were located in two different states. | · You provided a copy of the legal advice on the matter of genuine redundancy that you received. | You also state that as the Entity was in administration, and even if a successful suit was to be made against them, the reality is that it will not result in any monetary reward.