Private ruling: Genuine redundancy payment
Published: October 2012
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is any part of the payments received by you on termination of employment the tax-free part of a genuine redundancy payment? | A1: Yes.

Relevant facts and circumstances: You commenced employment with the employer (the Employer) after the 1996-97 income year. In the 2011-12 income year the Employer provided you with a notice wherein you were informed: (a) due to operational requirements it had been decided to close one of the Employer's branches (the Branch) in the 2011-12 income year and your position would be made redundant. (b) the Employer would assist you, during a job search period (the period), to search for redeployment to an alternate role within the Employer's organisation; (c) as an alternative to retrenchment, and in the absence of any positions being available at your current level, you may be offered continued employment at a lower level or with a lower remuneration package. Non acceptance of such an offer would not affect your entitlement to a retrenchment package; (d) during the period you and the Employer may agree finding an alternative position is unlikely. In such a case, subject to agreement between you and the Employer, the period may end and you will leave with a retrenchment package on an agreed date, prior to the closure of the Branch; (d) your employment with the Employer will end if you have not obtained a position within the Employer's organisation by the date of the Branch's closure. In this event you would be paid a retrenchment package which comprises a severance payment as well as any other entitlements under your contract of employment. You have provided a copy of the Enterprise Agreement (the EBA) which relates to your employment with the Employer. Termination of employment clauses in the EBA are present and mainly relate to: (i) the periods of notice each party, that is, the Employer and employee, is required to provide the other where there is a termination of employment; and (ii) what occurs in situations where there are cases of fraud, theft, misbehaviour etc are present. In relation to redundancy there is a subclause in the EBA which states: In addition to the period of notice for ordinary termination of employment; if an Employee's employment is terminated in circumstances where the number of Employees reasonably required by the Employer exceeds the number required to perform the work that is available, and this is not due to the ordinary and customary turnover of labour, a severance payment will be made. In relation to severance payments, the EBA also stated: (a) The maximum weeks pay an employee would receive which depended on the employee's years of continuous service; (b) When making the payment the Employer would a utilise an external fund (the Fund) which had been established pursuant to a deed to meet all liabilities for redundancy payments. (c) Employees will be entitled to a redundancy payment being the greatest of the following amounts: (i) the amount which had over time been paid by the Employer to the employee's account in the Fund; or (ii) the amount determined in (a) (above). (d) Where an Employee leaves the Employer for reasons other than being made redundant, the Employee will only be entitled to the balance of their Fund account. (e) The Employer will not be required to make any redundancy payment if the Employer obtains suitable alternative employment for an Employee, and the Employee unreasonably rejects that offer of employment. Upon your termination of employment, the Employer provided you with a letter (the letter) which stated: (a) you were employed in a permanent full time capacity; (b) the period you were employed; and (b) your employment was terminated as your position was made redundant. When your employment was terminated there was no agreement between the Employer and another person to re-employ you after your employment was terminated. The Employer provided you with a redundancy calculation which shows your severance entitlement was the maximum amount payable in accordance with the EBA. As this amount exceeded your balance in the Fund, the total severance payment was made from two separate sources, that is: (a) an amount from the Employer (the difference between the maximum amount payable and your balance in the Fund); and (b) your account balance in the Fund. The amount paid to you from the Employer, which was made in the 2011-12 income year, was treated as the tax-free amount of a genuine redundancy payment. In relation to the amount paid to you from the Fund, which was made in the 2011-12 income year, it was paid to you as employment termination payments. Copies of the Employment Termination Payment Summaries (the Summaries) have been provided and show amongst other items that they are comprised wholly of taxable components Your date of birth has been provided.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 82-10(2). | Income Tax Assessment Act 1997 Subsection 82-10(3). | Income Tax Assessment Act 1997 Section 82-130. | Income Tax Assessment Act 1997 Subsection 82-130(1). | 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 83-170. | Income Tax Assessment Act 1997 Section 83-175. | Income Tax Assessment Act 1997 Subsection 82-175(1) | Income Tax Assessment Act 1997 Subsection 82-175(2 | Income Tax Assessment Act 1997 Paragraph 82-175(2)(a) | Income Tax Assessment Act 1997 Paragraph 82-175(2)(b) | Income Tax Assessment Act 1997 Paragraph 82-175(2)(c) | Income Tax Assessment Act 1997 Subsection 82-175(3) | Income Tax Assessment Act 1997 Subsection 82-175(4)

Reasons for decision: Summary: The payment you received directly from your Employer constitutes a genuine redundancy payment (GRP) and is tax-free. No part of the payments you received from the Fund, constitute a GRP as they do not exceed what you would have received had you terminated employment under normal circumstances. Consequently, these payments, which satisfy the conditions in the income tax legislation for them to be treated as ETPs, are taxed according to their components. | 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) of the ITAA 1997 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. Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, 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. · capital payments for personal injury. | Detailed Reasoning - In consequence of the termination of your employment: In determining whether a payment is an ETP the first condition requires that the payment is received by the employee in consequence of the termination of their employment. In your case the Payments, that is, that amount from your Employer (the Employer) and the amount from the external fund (the Fund), were made to you in consequence of the termination of your employment with the Employer. As is evident from the facts, the Payments would not have been made were it not for the termination of your employment. Accordingly, subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied. | Detailed Reasoning - Payment received more than 12 months after termination: In addition to meeting the other conditions for a payment to be an ETP, paragraph 82-130(1)(b) of the ITAA 1997 specifies that the payment must be received within 12 months of the employee's termination of employment, unless they are covered by a determination exempting them from the '12 month rule'. As shown in the facts, your employment was terminated during the 2011-12 income year and the last of the Payments was also made to you during the 20110-12 income year. Accordingly, as the Payments were made within 12 months of the termination of your employment, the requirement in paragraph 82-130(1)(b) of the ITAA 1997 has been satisfied. | Detailed Reasoning - A payment mentioned in section 82-135 of the ITAA 1997: As previously mentioned, section 82-135 of the ITAA 1997 excludes certain payments from being an ETP. These payments include: · a payment for unused annual leave · a payment for unused long service leave · the tax-free part of a genuine redundancy payment · capital payments for personal injury. In your case, the facts provided show that the issue of whether any part of the Payments is a genuine redundancy payment (GRP) requires consideration. | Detailed Reasoning - Genuine redundancy payment: To determine if any part of the Payments you received constitute a GRP, all the conditions in section 83-175 of the ITAA 1997 need to be satisfied. Where a payment is made to an employee after 30 June 2007, a GRP is defined in subsection 83-175(1) of the ITAA 1997 as: 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. Subsection 83-175(2) of the ITAA 1997 states that for a payment to qualify as a GRP all of the following conditions must be met: (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 the dismissal. In addition, subsection 83-175(3) of the ITAA 1997 provides that a GRP 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 of the payment or at a later time. In addition, subsection 83-175(4) provides that a payment is not a GRP if it is a payment mentioned in section 82-135. The Commissioner has issued Taxation Ruling TR 2009/2 which outlines the Commissioner's view of the requirements to be satisfied for a payment to qualify as a genuine redundancy payment under section 83-175 of the ITAA 1997. It is proposed to examine each of these provisions. | Detailed Reasoning - The requirement under subsection 83-175(1) of the ITAA 1997: The first requirement which is specified in subsection 83-175(1) of the ITAA 1997 has four criteria: · the payment is in consequence of the employee's termination of employment; · the payment is received by an employee who is dismissed from employment; · the employee is dismissed because the employee's position is genuinely redundant; and · the payment 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. | Detailed Reasoning - Payment in consequence of termination: The issue of whether the Payments you received in the 2011-12 income year were in consequence of the termination of your employment was discussed above. It was determined that the Payments were made in consequence of your termination of employment. Therefore the criterion that the payment must be received in consequence of a termination is met. | Detailed Reasoning - Dismissal from employment: Dismissal from employment usually means that the termination of employment is involuntary on the part of the employee concerned and is instigated by the employer. From the facts provided, it is evident that your termination of employment was the result of a dismissal which was instigated by the Employer. Further, the dismissal is not the result of any misbehaviour on your part but arises from an operational decision made by the Employer to close one of its branches and not being able to find you an alternative position within its organisation. Therefore, the termination of your employment is clearly a dismissal for the purposes of subsection 83-175(1) of the ITAA 1997. | Detailed Reasoning - Genuine redundancy: Having established that the Payments were made in consequence of termination of employment, and there was a dismissal from employment for the purposes of subsection 83-175(1) of the ITAA 1997, the next criterion that needs to be considered is whether you were dismissed because your position is genuinely redundant. Redundancy is a situation where the dismissal of an employee is not caused by any consideration peculiar to the employee. Redundancy does not extend to a situation where an employee is dismissed for personal or disciplinary reasons or because the employee was inefficient, but rather because an employer no longer requires employees to carry out work of a particular kind or to carry out work of a particular kind at the same location. At paragraph 27 of TR2009/2 the following comment is made: … if an employer decides after downsizing or some other structural reorganisation to terminate an employee, the former position of the employee is redundant as long as the downsizing or reorganisation is the prevailing or most influential cause of the termination. In your case the facts show, as previously discussed, your dismissal was not for any reasons such as inefficiency or misbehaviour but due to the Employer reorganising its operations and not being able to find an alternative position for you with its organisation. In view of the above it is evident that your employment as due to a genuine redundancy and the Payments were made as a result of the genuine redundancy. Accordingly, the third criterion under subsection 83-175(1) of the ITAA 1997 is satisfied. The payment exceeds what you would have received in consequence of the voluntary termination of your employment at the time of your dismissal The last criterion that needs to be considered is whether the Payments exceed the amount that you could reasonably be expected to receive in consequence of the voluntary termination of your employment will be treated as a GRP. The Commissioner considers that it is necessary to show how the amount an employee is entitled to be paid exceeds the amount that is payable to employees who voluntarily terminate their employment. Paragraphs 61 to 63 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 years 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. However, this would be less so if the employer and employee are not dealing at arm's length. 63. There may be industry norms that could be used as a guide as to what payments would be made on voluntary termination. It may also be appropriate to compare standard payments made on voluntary termination within a particular company. However, these comparisons must take account of the actual nature of the dealings as influenced by the relationship between the parties. In the EBA which related to your employment there is a subclause in relation to redundancy payments which states: (a) The maximum weeks pay an employee would receive which depended on the employee's years of continuous service; (b) When making the payment the Employer would a utilise an external fund (the Fund) which had been established pursuant to a deed to meet all liabilities for redundancy payments. (c) Employees will be entitled to a redundancy payment being the greatest of the following amounts: (i) the amount which had over time been paid by the Employer to the employee's account in the Fund; or (ii) the amount determined in (a) (above). (d) Where an Employee leaves the Employer for reasons other than being made redundant, the Employee will only be entitled to the balance of their Fund account. (e) The Employer will not be required to make any redundancy payment if the Employer obtains suitable alternative employment for an Employee, and the Employee unreasonably rejects that offer of employment. The effects of the above (a), (b) and (c) are that they show how a payment will be made, and the amount payable, in cases where an employee has been made redundant. Notwithstanding the subclause in the EBA relates to an employee's entitlement to a redundancy payment, it should be noted that (d) above shows that in cases of an employee leaving the Employer for reasons other than redundancy, that employee will nevertheless be entitled to the balance of their Fund account. The effect of (d) is that an employee in non-redundancy situations can leave the Employer for any other reasons and gain access to the balance of their Fund account. Thus, as (d) is wide in its application it is considered that: (i) a payment being made for any reasons can include situations where an employee decides to voluntarily terminate employment; and (ii) in view of (i) an employee's balance in their Fund account would represent the amount they would receive upon voluntary termination of employment. In accordance with the EBA, you were entitled to a total redundancy payment, the maximum amount payable to you in accordance with the EBA. As a result of a paragraph in the EBA's redundancy subclause, whereby the Employer utilised the contributions it made to the Fund, the total redundancy payment made to you comprised separate payments from two sources, that is: (i) an amount from the Fund (the contributions the Employer had made to the Fund over the years); and (ii) an amount from the Employer (the maximum amount payable to you under the EBA less the amount from the Fun in (i)) Though your termination of employment was the result of a genuine redundancy, it is only the amount of the redundancy payment in excess of what you would have received had you voluntarily terminated employment which is a GRP. In your case the only amount of the total redundancy payment which exceeds what you would have received had you voluntarily terminated employment is the amount paid directly to you from the Employer. As discussed earlier, it is considered that a paragraph in the EBA shows the amount you would have received had you terminated employment for other reasons, which can include voluntary termination, is the amount paid to you from the Fund. Accordingly, the only amount of the total redundancy payment paid to you which is eligible to be a GRP, provided the remaining conditions in section 83-175 of the ITAA 1997 which are discussed below are satisfied, is the amount form the Employer. | Detailed Reasoning - The requirements under paragraphs 83-175(2)(a) and (b) of the ITAA 1997: As already noted previously, paragraph 83-175(2)(a) of the ITAA 1997 prescribes that the employee must be dismissed before the earlier of: · the day he or she turned 65; or · 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 applicable). It is accepted that there was no date prior to your 65 th birthday on which you were required to terminate employment, and that you were not required to terminate employment before you were dismissed on the effective date. Also given that you were under 65 years of age at the time of your dismissal, you have satisfied the requirements of paragraph 83-175(2)(a) of the ITAA 1997. Additionally, it is accepted that all dealings between yourself and the Employer were at arm's length. Therefore it follows that you have also satisfied the requirement under paragraph 83-175(2)(b) of the ITAA 1997. | Detailed Reasoning - The requirement under paragraph 83-175(2)(c) of the ITAA 1997: Also as noted previously, paragraph 83-175(2)(c) of the ITAA 1997 requires that 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 the dismissal. In the present case, there was no re-employment by your Employer nor is there evidence of any re-employment arrangement with another entity, so it is accepted that you have satisfied the requirement under paragraph 83-175(2)(c) of the ITAA 1997 in this case. | Detailed Reasoning - The requirements under subsections 83-175(3) and 83-175(4) of the ITAA 1997: Subsection 83-175(3) of the ITAA 1997 provides that a GRP does not include any part of a payment that is received in lieu of superannuation benefits. No part of the payment to be made to you is in lieu of superannuation benefits. Therefore it is accepted that the requirement under subsection 83-175(3) is satisfied. Also as noted previously, subsection 83-175(4) of the ITAA 1997 provides that a payment is not a GRP if it is a payment mentioned in section 82-135 (other than a GRP or early retirement scheme payment). Section 82-135 of the ITAA 1997 includes payments such as pensions, foreign termination payments, unused annual leave and unused long service leave. An examination of the payment made directly to you by the Employer shows that the requirement in subsection 83-175(4) of the ITAA 1997 has been satisfied. | Detailed Reasoning - A GRP under sections 83-170 and 83-175 of the ITAA 1997: You have satisfied all the criteria set out in section 83-175 of the ITAA 1997 and consequently it is considered that the amount directly paid to you by the Employer constitutes a GRP for the purposes of section 83-170. | Detailed Reasoning - Tax-free treatment of a GRP: 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) 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) Because your dismissal occurred during the 2011-12 income year, the base amount is $X and the service amount is $Y. In accordance with the above formula and applying the relevant facts, that is, your whole years of service and the payment you received from the Employer, the tax-free part of a GRP you can receive in the 2011-12 income year has been calculated. As the GRP is less than the tax-free amount determined under subsection 83-175(3) of the ITAA 1997, the payment the Employer made directly to you is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997. | Detailed Reasoning - Tax treatment of the employment termination payments (ETPs): In relation to the payments from BERT, which represent the balance of the redundancy payment, they are ETPs as: (i) they satisfy all the requirements in section 82-130 of the ITAA 1997, as discussed previously, for them to be treated as ETPs; and (ii) no part of these payments represents the tax-free part of a GRP. An employment termination payment may comprise of a: · Tax free component - as provided in section 82-140 of the ITAA 1997, this includes an invalidity segment within the meaning of section 82-150 of the ITAA 1997 (if any) and/or a pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997 (if any); and · Taxable component - the amount remaining after deducting the tax free component from the total payment, as prescribed in section 82-145 of the ITAA 1997. As shown in the facts, the payments do not contain invalidity segments within the meaning of section 82-150 of the ITAA 1997 but are comprised wholly of taxable components. Subsection 82-10(2) of the ITAA 1997 provides that the taxable component of a life benefit termination payment (LBTP), which the payments in your case satisfy, is assessable income. Accordingly, the payments are to be included in your income tax return for the 2011-12 income year. In relation to the rate of tax that applies to the payments, subsection 82-10(3) of the ITAA 1997 specifies that a taxable component is subject to tax and the rate applied depends on the recipient's age. As you are less your preservation age, the payments have been taxed at a maximum rate of X% plus Medicare levy. | Detailed Reasoning - Conclusion: The tax-free part of the GRP made to you is the amount directly paid to you by the Employer. As this is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997, it is not to be included in your tax return for the 2011-12 income year In relation to the ETPs paid from the Fund, which represent the balance of the redundancy payment, they are to be included as assessable income in your tax return for the 2011-12 income year.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.