Private ruling: Employment termination payment
Published: March 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is any part of the lump sum payment received by you an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 ? | A1: No.

Relevant facts and circumstances: You were employed by the Employer several years ago. You did not have a written employment agreement with the Employer. Your employment with the Employer was terminated in the 20XX income year. Records show a received was appointed in the 20XX income year. You commenced legal proceedings against the Employer shortly after to recover entitlements under a government Act (the Act). A liquidator was appointed in the 20YY income year. In the 20ZZ income year you received a letter from the liquidator outlining your share of the distribution under the Act. You received a gross payment comprising of annual leave, annual leave loading, long service leave and pay in lieu of notice. Taxes were withheld from all components of the payment. The PAYG payment summary for the year ending 30 June 2015 includes the amount of pay in lieu of notice in 'Gross payment' and the remainder of the amounts in Lump Sum A with code 'R' in the 'Type' box for payments made for genuine redundancy.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 83-15 | Income Tax Assessment Act 1997 section 83-85 | Income Tax Assessment Act 1997 section 82-130 | Income Tax Assessment Act 1997 subsection 82-130(1) | Income Tax Assessment Act 1997 section 82-135 | 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(3) | Income Tax Assessment Act 1997 subsection 83-175(4)

Reasons for decision: Summary: The amount of pay in lieu of notice is a genuine redundancy payment and consists wholly of the tax-free amount. Accordingly: • no part of the payment is an employment termination payment (ETP); and • the payment is not assessable income and is not exempt income. As a result, the amount of payment in lieu of notice is not required to be included in your income tax return for the 2014-15 income year. The amounts relating to your unused annual leave, annual leave loading and long service leave are excluded from being treated as either ETPs or a genuine redundancy payment. However, as these amounts, which must be included as assessable income in your 2014-15 income tax return, were made as a result of genuine redundancy they are subject to tax at no more than 30% plus Medicare levy. | 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. Section 82-135 of the ITAA 1997 provides that certain payments are not ETPs, including: • payment for unused annual leave or unused long service leave; • the tax-free part of a genuine redundancy payment (GRP) or an early retirement scheme payment. Accordingly, the amounts of the payment received by you for annual leave, annual leave loading and long service leave are excluded from being an ETP or a GRP under subsection 83-175(4) of the ITAA 1997. | Detailed Reasoning - Payment in lieu of notice: In relation to the amount for the payment in lieu of notice it is evident from the facts, including the PAYG payment summary that this payment was made in consequence of the termination of your employment in 20XX. Further it is noted that your employment ceased as you were made genuinely redundant as your position ceased to exist due to the Employer going into receivership. In view of the facts provided it is accepted that the payment in lieu of notice is a GRP for the purposes of section 83-175 of the ITAA 1997 as: • you were dismissed from employment due to genuine redundancy; • the payment is accepted as being more than what you would have received had you normally terminated employment; • you were less than 65 years of age when dismissed; • the payment was at arm's-length; • there was no arrangement between you and the Employer, or the Employer and another party, at the time of dismissal to employ you after the dismissal; and • no part of the payment was received by you in lieu of superannuation benefits. Accordingly, any amount of the GRP in excess of its tax-free amount is an ETP. | Detailed Reasoning - Tax free amount: 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 2014-15 income year: • Base amount is $9,514; • Service amount is the amount of pay in lieu of service; and • Years of service is the number of whole years in the period, or sum of periods, of employment to which the payment relates. As the payment in lieu of notice is below the tax-free amount of a GRP, the entire amount of the payment is the tax-free part of a GRP. 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 of pay in lieu of service is not required to be included in your income tax return for the 2014-15 income year. | Detailed Reasoning - Unused annual leave and long service leave: Section 83-15 and section 83-85 of the ITAA 1997 respectively provide that unused annual leave and long service leave payments made as a result of a genuine redundancy are included in your assessable income and subject to tax at no more than 30% (plus Medicare levy).