Private ruling: Employment termination payment - genuine redundancy
Published: December 2014
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014.

Ruling: Q1: Is any part of the redundancy payment and the payment in lieu of notice the tax-free part of a genuine redundancy payment? | A1: Yes.

Relevant facts and circumstances: You are less than 65 years of age. You commenced employment with the Employer prior to the commencement on the 2014-15 income year. The Employer has gone into liquidation and a liquidator has been appointed. As a result, your employment has ceased. During the 2014-15 income year you made a claim against the Employer for various amounts and entitlements including redundancy and payment in lieu of notice. The liquidator responded to your claim and accepted certain amounts, whilst rejecting others. The liquidator provided a breakdown of your final entitlements from the Employer as follows: Entitlement Gross Amount ($) Payment in Lieu of Notice (Taxable) A Payment in Lieu of Notice (Tax-Free) B Redundancy C Total D From these amounts, an amount of "$X" was withheld as pay as you go withholding from the Payment in Lieu of Notice (Taxable). No amount of tax was withheld from the amounts of $B or $C. You state that neither the redundancy or in lieu of notice payments (the payments) would not have been paid had you terminated employment voluntarily. None of the payments you received are for payment in lieu of superannuation. At the time of dismissal there was 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(e). | 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 total payment in lieu of notice ($A + $B) and the redundancy payment ($C), which amounts to $D, is a genuine redundancy payment. As this amount is less than your tax-free amount, in respect of the genuine redundancy of your employment, it is not assessable income and is not exempt income. | 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)). The redundancy payment and the payment in lieu of notice are addressed below. In a letter from the liquidator, you were advised that you were entitled to a redundancy payment for the amount of $C and payments in lieu of notice totalling $A + $B. When the Employer ceased trading and was placed into liquidation your position within the organisation effectively no longer existed and your employment was terminated. As such, it is considered that your employment was terminated because your position was made genuinely redundant. Further, as stated by you, neither the redundancy or in lieu of notice payments would have been made to you 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 were dismissed before you reached 65 years of age; • the dismissal was made at arm's length; and • at the time of dismissal, there was no 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 received were for payment in lieu of superannuation, this requirement is satisfied. Lastly, the redundancy payment and payment in lieu of notice are 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 have been satisfied, it is accepted that the redundancy payment and payment in lieu of notice totalling $D 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 $X; Service amount means $Y; and Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates. As the payment of $D 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 $D is not required to be included in your income tax return for the 2014-15 income year.