Private ruling: genuine redundancy payment
Published: August 2013
Ruling period: 2012-13 income year.
Date scheme commenced: 1 July 2012

Ruling: Q1: 1. Does the 12 month rule apply in respect of the payment made from the General Employee Entitlements and Redundancy Scheme (GEERS)? 2. Is any part of the payment received from GEERS a genuine redundancy payment? | A1: 1. No. 2. Yes.

Relevant facts and circumstances: You commenced employment with the Employer in the mid 1980s. The Employer subsequently went into liquidation and the Liquidator was appointed as the liquidator. In the third quarter of the 2011-12 income year, a new company purchased the assets of the Employer. You were not offered a position with this new company. As a result of the liquidation, your employment was terminated on in the third quarter of the 2011-12 income year. The position you held at the time was that of a financial controller. You received a redundancy payment from the General Employee Entitlements and Redundancy Scheme (GEERS) administered by the Department of Education, Employment and Workplace Relations (DEEWR). In a letter dated towards the end of the 2012-13 income year, you were advised by the Liquidator that funds were received from the Federal Government to meet your claim under GEERS. The letter provided details of wages, unused annual leave and long service leave, payment in lieu of notice and redundancy making up the GEERS payment together with the amount of tax instalments deducted from the payment. You were dismissed before you reached 65 years of age. None of the payments received were for payment in lieu of superannuation. At the time of your 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(c). | Income Tax Assessment Act 1997 Paragraph 82-135(d). | Income Tax Assessment Act 1997 Paragraph 82-135(e). | Income Tax Assessment Act 1997 Section 83-10. | Income Tax Assessment Act 1997 Section 83-15. | Income Tax Assessment Act 1997 Section 83-80. | Income Tax Assessment Act 1997 Section 83-85. | 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 payment from GEERS representing payment in lieu of notice and redundancy is a genuine redundancy payment. As this amount is less than the tax-free amount of a genuine redundancy payment as determined under the legislation, it is not assessable income and is not exempt income. The 12 month rule that applies to employment termination payments does not apply to the tax-free part of a genuine redundancy payment. Detailed reasoning Genuine redundancy payment A payment made to an employee is a genuine redundancy payment if it satisfies all the criteria set out in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997). Under subsection 83-175(1) of the ITAA 1997, four criteria must be satisfied: The payment must be received in consequence of a 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. You were employed by the Employer. The Employer subsequently went into liquidation. As noted in the facts, in a letter dated towards the end of the 2012-13 income year, the Liquidator advised that you were eligible for a gross payment of a specified amount after the Employer was placed in liquidation. Your Employer had ceased trading and your position ceased to exist. The decision to terminate your employment was made without your consent. Therefore, it is considered that the payment made to you was made in consequence of the termination of your employment. The termination of employment and the payment are all intertwined and connected. If not for the termination of employment, the payment would not have been made. Further, it is considered that you had been dismissed from your employment because their role with Employer has been made genuinely redundant. Therefore, subsection 83-175(1) of the ITAA 1997 has been satisfied. | Detailed Reasoning - Further conditions for a genuine redundancy payment: Subsection 83-175(2) of the ITAA 1997 sets out further criteria that must be satisfied for a payment to be regarded as a genuine redundancy payment. The first condition requires that the taxpayer is dismissed before the earlier of the day the taxpayer turns 65 or the day they reach a particular age or completed a particular period of service that would have terminated the taxpayer's employment. This condition is satisfied as you were dismissed before you were 65 years of age. The second condition requires that if the dismissal were not at arm's length, that the payment does not exceed the amount that could be reasonably expected to be made if the dismissal were at arm's length. This condition does not apply as the dismissal was made at arm's length. The third condition is that at the time of dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal. This condition is satisfied as, at the time of dismissal there was no arrangement (written, verbal or implied) between you 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, is 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. In this case, this condition is satisfied as no part of the payment was received by you in lieu of superannuation benefits. | Detailed Reasoning - Not a payment mentioned in section 82-135 of the ITAA 1997: Subsection 83-175(4) of the ITAA 1997 provides that a payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)). Section 82-135 includes (among others): (a) superannuation benefits; (b) the payment of a pension or annuity; and (c) unused annual leave or long service leave payments. In this case no part of the payment represents amounts mentioned in section 82-135 of the ITAA 1997 (apart from paragraph 82-135(e)). It is accepted that the payment representing payment in lieu of notice and redundancy 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) 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 2012-13 income year: Base amount means $8,806; Service amount means $4,404; 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 in lieu of notice and redundancy 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 not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997. Consequently the payment in lieu of notice and redundancy is not required to be included in your income tax return for the 2012-13 income year. | Detailed Reasoning - Exception from 12 month rule: Subsection 82-130(4) of the ITAA 1997 specifically excludes payments that are genuine redundancy payments or early retirement scheme payments from the 12 month rule. Since this amount is a genuine redundancy payment, it is exempt from the 12 month rule.