Private ruling: Genuine redundancy payment
Published: September 2014
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

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 are under 65 years of age in the 2014-15 income year. You commenced employment with the Employer less than 10 years ago. The Employer advised you that: (a) your position will no longer exist; and (b) your employment will be terminated during the 2014-15 income year. The following is a breakdown of your entitlements, as advised by the Employer: Component Payment Annual leave A Long service leave B Redundancy C According to your employment contract, you would not have been entitled to the redundancy payment had you voluntarily resigned. Your employment contract shows you are not employed for a fixed term or required to terminate employment at a particular date or age. None of the payments you will receive are for payment in lieu of superannuation. At the time of dismissal there will be 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 subsection 82-130(4). | 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(d). | Income Tax Assessment Act 1997 paragraph 82-135(e). | Income Tax Assessment Act 1997 section 83-10. | Income Tax Assessment Act 1997 section 83-15. | Income Tax Assessment Act 1997 section 83-80. | Income Tax Assessment Act 1997 section 83-85. | 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 redundancy payment (C) is 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 2014-15 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 payments you will receive for unused annual leave (A) and long service leave (B) are not genuine redundancy payments pursuant to subsection 82-135(4) of the ITAA 1997. The taxation treatment of these payments will be addressed in due course. The issue of the redundancy payment is addressed below. The Employer advised that you are entitled to a redundancy payment for the amount of C. The Employer has provided notice that your employment will be terminated during the 2014-15 income year and that the stated reason for termination is redundancy. Further, the facts show that your employment will be 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 will be for payment in lieu of superannuation, this requirement is satisfied. Lastly, the redundancy payment is not excluded from the definition of a GRP. As such, 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 totalling C 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 2014-15 income year: Base amount means $9,514; Service amount means $4,758; and Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates. Your employment commenced during the relevant income year and will cease on during the 2014-15 income year. Hence the 'years of service' to which the genuine redundancy payment relates is X whole years of service. Accordingly, the tax-free part of a genuine redundancy payment you can receive in the 2014-15 income year under subsection 83-175(3) of the ITAA 1997 is: $9,514 + ($4,758 × x years) As the payment of C is below the tax-free amount of a genuine redundancy payment, 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 C is not required to be included in your income tax return for the 2014-15 income year. | Detailed Reasoning - Taxation treatment of unused annual leave and unused long service payments: Unused annual leave and long service would ordinarily be included in assessable income under sections 83-10 and 83-80 of the ITAA 1997 respectively and be subject to marginal rates of tax. However, as these payments will be made in connection with a genuine redundancy payment, sections 83-15 and 83-85 allow tax offsets to ensure that the rate of tax on these amounts (A + B) do not exceed 30% plus Medicare levy.