Private ruling: Employment termination payment
Date of advice: 3 August 2015
Published: August 2015
Ruling period: Income year ended 30 June 2015
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is any part of the lump sum payment received by your genuine redundancy payment for the purposes of the Income Tax Assessment Act 1997 ? | A1: Yes.

Relevant facts and circumstances: You were employed by the Employer several years ago. An administrator was appointed by the Employer in early 20XX and your employment with the Employer was terminated on the same day. You commenced legal proceedings against the Employer shortly after to recover entitlements under the Fair Entitlements Guarantee Act 2012 (FEG Act 2012). You were advised in a letter from the Department of Employment regarding your claim under the FEG Act 2012 and your eligibility for a gross advance (the Payment). The letter showed the breakdown of the payment. The letter also states that your employment with the Employer fell outside the scope of any award and was not covered by a Certified or Enterprise Agreement. You received a letter from the administrator outlining the breakdown of your entitlements and applicable taxes. You are less than 65 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 6-5(2) | Income Tax Assessment Act 1997 section 82-130 | Income Tax Assessment Act 1997 section 82-135 | Income Tax Assessment Act 1997 section 83-15 | Income Tax Assessment Act 1997 section 83-85 | Income Tax Assessment Act 1997 section 83-170 | Income Tax Assessment Act 1997 section 83-175

Reasons for decision: Summary: The payment in lieu of notice and redundancy payment is a genuine redundancy payment and consist wholly of the tax free amount. Accordingly: a) no part of the payment is an employment termination payment (ETP); and b) the payment is not assessable income and is not exempt income. As a result, both payments are not required to be included in your income tax return for the 2014-15 income year. The amounts relating to your unused annual leave 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. The amount relating to unpaid wage entitlements is not an employment termination payment. This amount is to be included in your assessable income in your 2014-15 income tax return and taxed at your marginal tax rate. | 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 or an early retirement scheme payment. Accordingly, the amounts of the payment received by you for annual leave and long service leave are excluded from being an ETP or a genuine redundancy payment (GRP) under subsection 83-175(4) of the ITAA 1997. | Detailed Reasoning - Payment in lieu of notice and redundancy pay: In relation to the payment in lieu of notice and redundancy pay, it is evident from the facts that these payments were made in consequence of the termination of your employment. 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 administration. In view of the facts provided it is accepted that the payment in lieu of notice and redundancy pay is a GRP for the purpose 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 $4,758; 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 and redundancy payment 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 total of those amounts are 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 genuine redundancy are included in your assessable income and subject to tax at no more than 30% (plus Medicare levy). | Detailed Reasoning - Unpaid wage entitlements: Unpaid wages is not an ETP. It is ordinary income under subsection 6-5(2) of the ITAA 1997 and is to be included in your assessable income and subject to tax at your marginal tax rate.