Private ruling: Genuine redundancy
Published: June 2012
Ruling period: 1 July 2011 to 30 June 2012
Date scheme commenced: 1July 2011.

Ruling: Q1: Is the lump sum payment received on the termination of employment a genuine redundancy payment? | A1: Yes.

Relevant facts and circumstances: You are under age 55. You commenced employment with your employer (Entity 1) in 2001. You received a letter from Entity 1 in 2011 which included the following details: Entity 1 will cease operating the facility where you were employed with effect from the specified date in 2012; and as a consequence, your employment with Entity 1 will also terminate with effect on that date. You would receive $X as a redundancy payment subject to the following terms and conditions: · You will continue to be employed up to and including the specified date in 2012 but the redundancy payment on offer would not be available if your employment terminated prior to the specified date in 2012, for example, if you decided to resign earlier. · On termination of your employment, you would enter into a Deed of Release with Entity 1 · You will also receive payment in respect of any accrued but untaken statutory entitlements up to the date of termination. · You signed and returned the Deed of Release to Entity 1. Clause 2 of the Deed of Release stated your employment terminated on the specified date in 2012 on the basis of redundancy as a result of a decision by another related entity (Entity 2) not to renew the lease with Entity 1 as the provider. Clause 3 of the Deed of Release included a statement that $X is a redundancy payment. However, the employer (Entity 1) has not treated the payment of $X as a redundancy payment for PAYG withholding purposes and has withheld tax from the payment by treating the amount as normal income. The employer whilst recording the payment as a redundancy, has refused to correctly tax the payment without an instruction from the Australian Taxation Office. The Centrelink Employment Separation Certificate dated in 2012 shows the employer has categorised the payment of $X as a gratuity or golden handshake; and the reason given for separation as "the service was outsourced to another provider."

Relevant legislative provisions: 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)(b) | 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(e) | Income Tax Assessment Act 1997 Section 82-170 | Income Tax Assessment Act 1997 Subsection 82-170(2) | Income Tax Assessment Act 1997 Subsection 82-170(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 83-75(2)(a) | Income Tax Assessment Act 1997 Paragraph 83-75(2)(b) | Income Tax Assessment Act 1997 Paragraph 83-75(2)(c) | Income Tax Assessment Act 1997 Subsection 83-175(3) | Income Tax Assessment Act 1997 Subsection 83-175(4)

Reasons for decision: Summary: The lump sum payment of $X is a payment made in consequence of the termination of your employment. The payment is also a genuine redundancy payment. The whole amount is a tax-free amount and is not assessable income and is not exempt income. | Detailed Reasoning - Employment termination payment: A payment made to an employee is an employment termination payment (ETP) if the payment satisfies all the requirements in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997) and is not specifically excluded under section 82-135. Subsection 82-130(1) states: 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 the termination (but see subsection (4)); and (c) it is not a payment mentioned in section 82-135. Based on the information provided, the lump sum payment of $X was made to you in consequence of the termination of employment because there is a nexus between the termination of employment which occurred on the specified date in 2012 and the lump sum payment made to you on that date. This is in accordance with the Commissioner's view in Taxation Ruling 2003/13 (TR 2003/13) and subparagraph 82-130(1)(a)(i) of the ITAA 1997. In other words, you would not otherwise receive the payment except for the termination of your employment. Consequently, as the payment was made in consequence of the termination of employment, it is an ETP as defined in subparagraph 82-130(1)(a)(i) of the ITAA 1997. Not a payment mentioned in section 82-135 of the ITAA 1997 Section 82-135 of the ITAA 1997 provides that certain payments are not employer termination payments. These include (among others): · superannuation benefits; · unused annual leave or long service leave payments; · foreign termination payments covered under Subdivision 83-D of the ITAA 1997; and · the tax-free part of a genuine redundancy payment or an early retirement scheme payment. | Detailed Reasoning - Genuine redundancy payment: Section 83-175 of the ITAA 1997 sets out the criteria to be met in order for a payment to be considered a genuine redundancy payment. Section 83-170 applies to treat so much of the relevant payment (that does not exceed the amount worked out under a specified formula) as tax-free. That is, the tax-free part is not assessable income and is not exempt income. Under subsection 83-175(1), one of the criteria to be met is that the payment is 'received by an employee who is dismissed from employment' because the employee's position is genuinely redundant. In Taxation Ruling 2009/2 Income tax: genuine redundancy payments , the Commissioner has outlined the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy payment under section 83-175 of the ITAA 1997. There are four necessary components within this termination requirement: · The payment being tested must be received in consequence of an employee's termination. · That termination must involve the 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. | Detailed Reasoning - Component 1: Payment being tested must be received in consequence of an employee's termination.: It has been established previously that the lump sum payment of $X has been received in consequence of the termination of your employment on the specified date in 2012. Therefore the requirement of the first component of subsection 83-175(1) of the ITAA 1997 has been satisfied. | Detailed Reasoning - Component 2: That termination must involve the employee being dismissed from employment.: On the basis of the facts as presented in your case, it is evident you were dismissed from your employment at the initiative of your employer. Your employer (Entity 1) ceased operating the facility at which you were employed due to the decision made by Entity 2 not to renew the lease. As a consequence, your employment was terminated effective from the specified date in 2012. Therefore, this second component of subsection 83-175(1) of the ITAA 1997 has been satisfied. | Detailed Reasoning - Component 3: That dismissal must be caused by the redundancy of the employee's position.: Based on the information provided it is evident that your employer made the ultimate decision that your position was redundant and that was the prevailing reason you were dismissed from your employment. The employer has confirmed this in their letter to you dated in 2011, in the Deed of Release and in the Centrelink Employment Separation Certificate dated in 2012. Therefore the facts lead to the conclusion the reason for your dismissal was the redundancy of your position at the facility which was operated by your employer. | Detailed Reasoning - Component 4: The redundancy payment must be made genuinely because of a redundancy.: It is considered the condition for this fourth component has been satisfied as: · you were aged under 65 at the termination date; · the termination was not at the end of a fixed period of employment; · the actual amount that was paid is not greater than the amount that could reasonably be expected to be paid had the parties been dealing at arm's length; · the amount that was paid was in excess of what your client would have been entitled to receive if she had voluntarily resigned; · there was no arrangement for re-employment with the employer or a related party after the termination date; and · the payment was not in lieu of superannuation benefits. On the basis of the information provided, it is considered the conditions of subsections 83-175(2) and 83-175(3) of the ITAA 1997 are also satisfied. Consequently, it can be concluded that the lump sum payment of $X, is a genuine redundancy payment as defined in section 83-175 of the ITAA 1997. | Detailed Reasoning - Taxation of a genuine redundancy payment: 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) 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) Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates. For the 2011-12 income year: Base amount means $8,435; and Service amount means $4,218. Your employment commenced in 2001 and ceased on the specified date in 2012. Hence the 'years of service' to which the genuine redundancy payment relates is Y whole years of service. Accordingly, the tax-free part of a genuine redundancy payment you can receive in the 2011-12 income year is $Z [$8,435 +($4,218 x Y)]. This tax-free amount is not assessable income and is not exempt income in accordance with subsection 83-170(2) of the ITAA 1997. Therefore, it is concluded that the payment of $X consists entirely of the tax-free part of a genuine redundancy payment and should appear on your PAYG payment summary for the 2011-12 income year as a Lump sum D amount. The total lump sum amounts for unused annual leave and unused long service leave on termination of employment because of a genuine redundancy should appear on your PAYG payment summary as a Lump sum A amount

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