Private ruling: Genuine redundancy - payment in lieu of notice
Date of advice: 31 July 2020
Published: September 2020
Ruling period: 1 July 20XX to 30 June 20XX

Ruling: Q1: With regard to the Employer's PAYG withholding obligations, will the payment in lieu of notice made to the Employee be a genuine redundancy payment under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No, the payment in lieu of notice made to the Employee is not a genuine redundancy payment. The payment is an employment termination payment and the Employer will be required to withhold tax in accordance with section 12-85 of the Taxation Administration Act 1953 (TAA).

Relevant facts and circumstances: The Employer entered into liquidation. The Employer ceased operating and the Employee was made redundant. The Employee is over 45 years of age and below the pension age. The Employee had been employed for X full years of service. The employment contract provides that on termination of employment there is a requirement for a minimum of 4 weeks period of notice for an employee with 5 years or more of continuous service. If the employee is 45 years of age with 2 years of continuous service, they will be entitled to receive a further one week's notice. It is the Employer's discretion as to whether the payment is made in lieu of notice. The notice period requirement relates to both termination by the Employer and voluntary termination by the employee. The Employee was not required to work their notice period and so a payment in lieu of notice was made.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 82-130 | Income Tax Assessment Act 1997 section 83-175 | Taxation Administration Act 1953, Schedule 1, section 12-85 We followed these ATO view documents | Taxation Ruling TR 2009/2: Income tax: genuine redundancy payments

Reasons for decision: Detailed Reasoning - Genuine redundancy: A payment made to an employee is a genuine redundancy payment if it satisfies all of the criteria set out in section 83-175 of the ITAA 1997. In accordance with subsection 83-175(1) of the ITAA 1997, 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 the dismissal. Paragraph 11 of Taxation Ruling TR 2009/2: Income tax: genuine redundancy payments (TR 2009/2), outlines the requirements to be satisfied under subsection 83-175(1) of the ITAA 1997. There are four necessary components within this requirement: · The payment being tested must be received in consequence of an employee's termination. · That termination must involve an employee being dismissed from employment. · That dismissal must be caused by the redundancy of the employee's position. · The redundancy payment must be made genuinely because of a redundancy. Based on the information provided, the essential components have been satisfied in this case, however there are further conditions that must be met before the payment can be treated as a genuine redundancy. Conditions in subsections 83-175(2) and (3) of the ITAA 1997 require that: · the dismissed employee is not older than specified age limits · the termination is not at the end of a fixed period of employment · the actual amount paid is not greater than the amount that could reasonably be expected had the parties been dealing at arm's length, in the event that the employer and employee are in fact not dealing at arm's length in relation to the dismissal · there is no arrangement entered into between the employer and the employee or the employer and another entity to employ the dismissed employee after the termination (paragraph 83-175(2)(c)), and · the payment is not in lieu of superannuation benefits. Based on the information provided, the conditions in subsections 83-175(2) and (3) of the ITAA 1997 are satisfied. | Detailed Reasoning - Voluntary termination of employment element: Subsection 83-175(1) of the ITAA 1997 requires the payment to exceed the amount that the Employee could reasonably be expected to receive in consequence of voluntarily terminating their employment. Paragraphs 61 and 62 of TR 2009/2 state: 61. It would generally be expected that a greater amount would be paid on redundancy than voluntary termination. This recognises the purpose of redundancy payments, being primarily to compensate for loss of non-transferable entitlements (for example accrued sick leave and accrued long service leave prior to 10 year's service) and the peculiar hardship associated with being made redundant. 62. Contractual or other entitlements payable by an employee on voluntary termination are generally a sound guide as to what might reasonably be expected. ... The Employee, who is over 45, received 5 weeks payment in lieu of notice as per the terms of his employment contract. The terms of the contract provide that the Employer will pay an employee, on the provision of notice, the same amount of severance pay if they choose to voluntary terminate their employment. It is at the Employer's discretion whether the payment is made in lieu of notice. Therefore, the Employee could reasonably have expected to receive the 5 week payment if he had voluntarily terminated his employment. Consequently, the payment in lieu of notice is not considered in excess of an amount that could reasonably be expected to be received in consequence of a voluntary termination. As the Employee does not satisfy all the requirements of subsection 83-175(1) of the ITAA 1997, the payment in lieu of notice is not a genuine redundancy payment and will be an employment termination payment as per section 82-130. Subsequently, the Employer will be required to withhold tax in accordance with section 12-85 of the TAA.