Private ruling: Genuine redundancy payment
Published: April 2013
Ruling period: For the year ended 30 June 2013 | This scheme commenced on | 1 July 2012

Ruling: Q1: Is any part of an employment termination payment received by the taxpayer a tax-free part of a genuine redundancy payment in accordance with section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: Over 20 years ago your client commenced employment with an employer (Employer 1) in various positions. Over 5 years ago the functions and responsibilities of Employer 1 were amalgamated with those of a new employer (Employer 2) and your client's position with Employer 1 was transferred to Employer 2. In the 20XX income year due to a workforce reform your client's position with Employer 2 was transferred to another employer Employer 3. During the years of your client's employment with Employer 3 your client was not appointed to a specific position or given a position description. The terms and conditions of employment for employees affected by the transfers were protected.until such time as the new employer developed their own Enterprise Bargaining Agreement (EBA). The terms and conditions included the offering of voluntary redundancy packages to surplus employees after all other reasonable alternatives have been exhausted. Voluntary redundancy would only occur following a decision by the employer that the job an employee was doing is no longer required and the employee accepts the offer of voluntary redundancy. Benefits included a specified number of weeks' pay severance benefits, up to a specific number of weeks' pay early separation incentive payment, and a specific number of weeks minimum amount of notice for employees aged a number of years or over. In the fourth quarter of the relevant income year, Employer 3 called for expressions of interest in a voluntary redundancy program (VRP). Your client expressed an interest in the VRP and was advised that the current VRP request was reviewed in line with business and operational requirements. Your client was provided a quotation regarding the detailed breakdown of components based on a separation date with a view to proceed with your client's voluntary redundancy. The redundancy calculation shows your client had completed a number of years service and would receive a redundancy pay and a redundancy incentive. The calculation did not include leave loading, sick leave payout, RDO entitlement and notice period. These were to be determined at final calculation. Employer 3 confirmed your client's acceptance of their voluntary redundancy offer and requested your client to sign and return a separation agreement and that your client's employment would cease in the first quarter of the subsequent income year. Employer 3 confirmed your client's position and role was no longer required. The letter also advised that participants of the VRP would be ineligible for employment with Employer 3 or their contractor for 12 months after the separation date. As a result of the redundancy your client was entitled to receive a redundancy payment which included a specified number of weeks severance payment, incentive payment and pay in lieu of notice. Employer 3 has confirmed the breakdown of your client's payment which included incentive payment, in lieu of notice, redundancy payment, accrued RDO's and accrued sick leave. On resignation or termination of employment your client was entitled to receive your client's RDO accrual, accrued sick leave, unused annual leave and unused long service leave. Your client could have expected to continue with Employer 3 up until reaching retirement age, notionally at age 65. No payment was made to your client in lieu of superannuation benefits. Your client is under 55 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 27F. | Income Tax Assessment Act 1936 Subsection 27F(1). | 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)(a). | Income Tax Assessment Act 1997 Paragraph 82-130(1)(b). | Income Tax Assessment Act 1997 Paragraph 82-130(1)(c). | 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(c). | Income Tax Assessment Act 1997 Paragraph 82-135(d). | Income Tax Assessment Act 1997 Paragraph 82-135(e). | Income Tax Assessment Act 1997 Subdivision 83-A. | Income Tax Assessment Act 1997 Subdivision 83-B. | Income Tax Assessment Act 1997 Section 83-170. | 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 Paragraph 83-175(2)(a). | Income Tax Assessment Act 1997 Paragraph 83-175(2)(b ). | Income Tax Assessment Act 1997 Paragraph 83-175(2)(c). | Income Tax Assessment Act 1997 Subsection 83-175(3). | Income Tax Assessment Act 1997 Subsection 83-175(4). | Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision: Summary: Part of the payment represents the tax free part of a genuine redundancy payment which is not assessable income and is not exempt income. Therefore the tax free amount calculated under the formula is not required to be included in your client's income tax return. The amount in excess of the tax free amount as well as the RDO accrual are taxable components of an employment termination payment which are to be included in your client's assessable income for the subsequent income year. Your client is entitled to receive a tax offset to ensure that the rate of tax for these amounts do not exceed 30%. In addition the Medicare levy may apply. The payments made for unused long service leave and unused annual leave are to be included in your client's assessable income for the subsequent income year. As these payments were being made in connection with a genuine redundancy payment, your client is entitled to receive a tax offset to ensure that the rate of tax for these payments do not exceed 30%. In addition the Medicare levy may apply. The payment for accrued sick leave is to be included in your client's assessable income and will be taxed at your client's marginal rate of tax. In addition the Medicare levy may apply. | Detailed Reasoning - Employment termination payment: Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that: employment termination payment has the meaning given by section 82-130 of the 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. Subsection 82-130(2) of the ITAA 1997 states: A life benefit termination payment is an employment termination payment to which subparagraph (1)(a)(i) applies. Failure to satisfy any of the three conditions in section 82-130 of the ITAA 1997 will result in the payment not being considered an employment termination payment. Furthermore, any termination payments received outside of the 12 months will be taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12 month rule. As noted in the facts of this case, your client received a gross amount with an amount of tax withheld on the termination of employment. The amount included an early separation incentive payment, pay in lieu of notice, severance payment, RDO accrual, accrued sick leave and unused long service leave and unused annual leave. Your client was entitled to access the accrued sick leave entitlement in one or more payments at any time throughout the Agreement and prior to the termination of your client's employment. Therefore this payment was not made in consequence of the termination and is assessable as normal income. The remaining payments were made in consequence of the termination of your client's employment and made within 12 months of the termination of your client's employment. Consequently, paragraphs 82-130(1)(a) and (b) of the ITAA 1997 have been satisfied. | Detailed Reasoning - Specific exclusions from being an employment termination payment: Paragraph 82-130(1)(c) of the ITAA 1997 specifically excludes payments mentioned in section 82-135 from being employment termination payments. Section 82-135 provides that certain payments are not employment termination payments. Of particular note, in this case, are paragraphs 82-135(c) (d) and (e). Paragraph 82-135(c) of the ITAA 1997 excludes unused annual leave payments and paragraph 82-135(d) excludes unused long service leave payments from being employment termination payments. These payments are covered separately under Subdivision 83-A and Subdivision 83-B. The tax treatment of these payments will be dealt with later in this ruling. Paragraph 82-135(e) of the ITAA 1997 excludes the tax-free part of a genuine redundancy payment or an early retirement scheme payment worked out under section 83-170. Therefore, it is necessary to determine the extent (if any) to which the remaining payments (incentive payment, severance payment and RDO accrual and accrued sick leave): · qualify as genuine redundancy payments; and · are excluded as the tax-free part of a genuine redundancy payment. | Detailed Reasoning - Genuine redundancy payment: A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all criteria 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 as 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)). Prior to 1 July 2007, such a payment was known as a bona fide redundancy payment (BFRP), in accordance with former subsection 27F(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Under subsection 83-175(1) of the ITAA 1997, a GRP is a payment resulting from: (i) a dismissal; (ii) the employee's position is genuinely redundant; and (iii) 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. The Explanatory Memorandum to the Income Tax Assessment Amendment Act (No.3) 1984 which inserted former section 27F into the ITAA 1936 states at page 91: The terms dismissal and "redundancy" are not defined in the legislation and, therefore, should be given their ordinary meanings. "Dismissal" carries with it the concept of the involuntary (on the taxpayer's part) termination of employment. "Redundancy" carries the concept that the requirements of the employer for employees to carry out work of a particular kind, or for employees to carry out work of a particular kind in the place where they were so employed, have ceased or diminished or are expected to cease or diminish. Redundancy, however, would not extend to the dismissal of an employee for personal or disciplinary reasons or for reasons that the employee was inefficient.' Consequently, it is necessary to consider the ordinary meaning of the terms dismissal and redundancy and the meaning the judicial authorities have ascribed to them. The Commissioner has issued Taxation Ruling TR 2009/2, titled Income Tax: genuine redundancy payments . The Ruling provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997. Paragraphs 18, 20 and 22 of TR 2009/2 discuss what constitutes a 'dismissal' and 'redundancy': 18. Dismissal is a particular mode of employment termination. It requires a decision to terminate employment at the employer's initiative without the consent of the employee. This stands in contrast to employment that is terminated at the initiative of the employee, for example in the case of resignation. … 20. A dismissal can still occur even where an employee has indicated that they would be interested in having their employment terminated, provided that the final decision to terminate employment remains solely with the employer. Such a case may arise where expressions of interest in receiving a redundancy package are sought from employees as part of a structured process undertaken by the employer as a means of promoting industrial harmony. … 22. Cases of 'constructive dismissal' are a dismissal for the purposes of subsection 83-175(1). Constructive dismissal is currently recognised to occur where the actions or behaviour of the employer in relation to the employment relationship effectively curtails the element of consent on the employee's behalf. The simplest example of constructive dismissal is where an employee resigns under threat (explicit or implicit) of dismissal. Another example is where the employee resigns after the employer offers work in an alternative position which is inappropriate given the employee's particular circumstances (for example, their skills or experience). While in form this appears to be a termination at the employee's initiative, it is recognised at law to be a dismissal. A payment is classified as a GRP only upon meeting all of the requirements set under section 83-175 of the ITAA 1997 and dismissal only forms part of those requirements. In AAT Case 12,997 (1998) 39 ATR 1073; Case 12/98 (1998) 98 ATC 183, a payment received by a taxpayer was treated as a BFRP not solely due to the taxpayer having been constructively dismissed but, also due to his job having been abolished. Paragraphs 24, 25 and 28 of TR 2009/2 provide the following comments in relation to the meaning of redundancy: 24. As is the case in determining if there is a dismissal, the reason for a dismissal is to be established in light of the facts and circumstances of each case. The redundancy of the relevant position must be the prevailing or most influential reason for the dismissal if there is more than one contributing cause. 25. An employee's position is redundant when an employer determines that it is superfluous to the employer's needs and the employer does not want the position to be occupied by anyone. Accordingly, it is fundamentally the employer's decision that a position is redundant. On occasion the decision may be unavoidable due to the circumstances surrounding the employer's operations. 28. A dismissal is not caused by redundancy where personal acts or default are the prevailing or most influential cause for the termination. For example, a person may be dismissed due to unsatisfactory performance or behaviour. In this case, the termination of your client's employment is clearly a dismissal, as your client's employment was terminated following a decision made by Employer 3 to offer your client a voluntary redundancy package for loss of job tenure and your client accepting the offer of voluntary redundancy in accordance with the Workforce Framework. The termination of your client's employment was not on account of any personal act or default on your client's part, and was not due to the ordinary and customary turnover of labour. Rather the employer made the decision that the job your client was doing was no longer required and made the offer of voluntary redundancy. Your client was entitled to receive a voluntary redundancy package which included a specified number of weeks severance payment and an early separation incentive payment of a specified number of weeks' pay which was offered to encourage your client to terminate on a specified date. In addition, your client was entitled to receive the RDO accrual, accrued sick leave and a specified number of weeks' pay in lieu of notice. | Detailed Reasoning - Voluntary redundancy payment: On termination of employment, your client received a payment from your client's former employer with an amount of tax withheld. As noted earlier only that part of the payment that 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 will be considered a GRP. The severance payment, pay in lieu of notice and the early separation incentive payment are payments in excess of the amount that could reasonably be expected to be received by your client had your client voluntarily resigned or retired from employment with Employer 3. The amount representing the RDO accrual is not in excess of an entitlement your client would have received had your client resigned or retired from employment. Consequently, this amount cannot be considered to be a GRP. As this payment was made in consequence of your client's termination of employment it will be taxed as an employment termination payment. As noted previously, it is considered that the decision made by your client's employer to terminate your client's employment in the subsequent income year is a dismissal. Furthermore your client's employment was terminated, having completed a specified number of years of continuous service. Therefore it is considered that your client was dismissed from employment because your client's position is genuinely redundant. In respect of the payments representing the severance payment, pay in lieu of notice and the early separation incentive payment, it is accepted that all the conditions in subsection 83-175(1) of the ITAA 1997 have been satisfied. Your client was under the age of 65 years when your client's employment was terminated. There is no date prior to your client attaining age 65 where your client would have had to retire from employment. The employer and your client were dealing with each other at arm's length and there is no evidence to indicate that there was an arrangement between your client and the employer, or the employer and another person, to employ your client after the termination time. There is no evidence to indicate that any part of the payment is in lieu of superannuation benefits to which your client may have become entitled at the time of the payment or at a later time. Therefore, it is accepted that all the conditions in subsection 83-175(2) and subsection 83-175(3) of the ITAA 1997 have been satisfied in respect of the severance payment, pay in lieu of notice and the early separation incentive payment. Consequently, these payments are considered to be genuine redundancy payments. | Detailed Reasoning - Tax free amount: Section 83-170 of the ITAA 1997 applies to determine the tax-free treatment of a genuine redundancy payment. Section 83-170 places a limit on the amount of a genuine redundancy payment that is eligible for concessional tax treatment. So much of the genuine redundancy payment that does not exceed the amount worked out using the prescribed formula is not assessable income and is not exempt income. Under subsection 83-170(3) of the ITAA 1997, the formula for working out the tax free amount is: Base amount + (Service amount × Years of service) As your client's dismissal occurred during the subsequent income year, the base amount will be $8,806 and the service amount will be $4,404. Therefore the amount calculated under the formula in accordance with subsection 83-170(3) of the ITAA 1997, is the tax-free part of the genuine redundancy payment. After deducting the tax free amount of the genuine redundancy payment the remaining amount is a taxable component of an employment termination payment. | Detailed Reasoning - Tax Treatment of the employment termination payment: The taxable components of all life benefit employment termination payments received in an income year are counted towards an ETP cap. The amount up to the ETP cap amount will be taxed at a concessional rate. The amount in excess of the ETP cap amount will be taxed at the top marginal rate. For the subsequent income year, the ETP cap is $175,000. The taxable components of all life benefit employment termination payments received in an income year are counted towards this cap. The ETP cap is reduced by the amount of any earlier employment termination payment received in the same income year or, in relation to the same employment termination, in previous income years. Any tax-free amounts are not counted towards the cap. In this case, your client is under preservation age on the last day of the income year in which the payment was made. Therefore the amount in excess of the tax free limit and the RDO accrual are taxable components of an employment termination payment which are to be included in your client's assessable income for the subsequent income year. As these payments are under the ETP cap of $175,000, your client is entitled to a tax offset that ensures that the rate of income tax on these amounts do not exceed 30%. In addition, the Medicare levy may apply. | Detailed Reasoning - Entitlement to tax offset - unused annual leave and unused long service leave: The payments made for unused long service leave and unused annual leave are to be included in your client's assessable income for the subsequent income year. As these payments were being made in connection with a genuine redundancy payment, your client is entitled to receive a tax offset to ensure that the rate of tax for these payments do not exceed 30%. In addition, the Medicare levy may apply.