Private ruling: Redundancy payments
Published: May 2012
Ruling period: For the year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is any part of the payment the taxpayer received on termination of employment a tax-free part of a genuine redundancy payment in accordance with section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)? Is the taxpayer's unused annual leave and leave loading subject to a tax offset due to being made redundant? Is the taxpayer's rostered day off (RDO) accrual subject to a lower tax rate due to being made redundant? Advice/Answers Yes. Yes. Yes.


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 Subsection 82-10(4). | Income Tax Assessment Act 1997 Subsection 82-130(1). | Income Tax Assessment Act 1997 Paragraph 82-130(1)(a) | Income Tax Assessment Act 1997 Paragraph 82-130(1)(b) | Income Tax Assessment Act 1997 Paragraph 82-130(1)(c) | Income Tax Assessment Act 1997 Subsection 82-130(2). | Income Tax Assessment Act 1997 Section 82-135. | Income Tax Assessment Act 1997 Subsection 82-135(c). | Income Tax Assessment Act 1997 Subsection 82-135(e). | Income Tax Assessment Act 1997 Subsection 83-10(2). | Income Tax Assessment Act 1997 Section 83-15. | 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 Paragraph 83-175(2)(a). | Income Tax Assessment Act 1997 Paragraph 83-175(2)(b). | Income Tax Assessment Act 1997 Paragraph 83-175(2)(c). | Income Tax Assessment Act 1997 Subsection 83-175(3). | Income Tax Assessment Act 1997 Subsection 83-175(4). | Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision: Summary: The payment made in lieu of notice and redundancy pay is considered to be a genuine redundancy payment as all the conditions have been satisfied. As the payment is below the tax-free amount of a genuine redundancy payment it is not assessable income and is not exempt income. Therefore it is not required to be included in your income tax return for the 2011-12 income year. You are entitled to receive a tax offset to ensure that the rate of tax for the payment for unused annual leave and leave loading does not exceed 30%. In addition, the Medicare levy may apply. The RDO accrual payment is a taxable component of an employment termination payment and is to be included in your assessable income for the 2011-12 income year. As the RDO accrual payment is below the employment termination payment cap for the 2011-12 income year you are entitled to receive a tax offset to ensure that the rate of tax for the RDO accrual amount does not exceed 30%. In addition, the Medicare levy may apply. | Detailed Reasoning - Employment termination payment: Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that: employment termination payment has the meaning given by section 82-130 of the 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. Subsection 82-130(2) of the ITAA 1997 states: A life benefit termination payment is an employment termination payment to which subparagraph (1)(a)(i) applies. Failure to satisfy any of the three conditions in section 82-130 of the ITAA 1997 will result in the payment not being considered an employment termination payment. Furthermore, any termination payments received outside of the 12 months will be taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12 month rule. As noted in the facts of this case, you received a termination payment, redundancy payment, annual leave, leave loading and RDO accrual payments on the termination of your employment due to redundancy. The payments were made in consequence of the termination of your employment and made to you within 12 months of the termination of your employment. Consequently, paragraphs 82-130(1)(a) and (b) of the ITAA 1997 have been satisfied. | Detailed Reasoning - Specific exclusions from being an employment termination payment: Paragraph 82-130(1)(c) of the ITAA 1997 specifically excludes payments mentioned in section 82-135 from being employment termination payments. Section 82-135 provides that certain payments are not employment termination payments. Of particular note, in this case, are paragraphs 82-135(c) and (e). Paragraph 82-135(c) of the ITAA 1997 excludes unused annual leave payments (including payment unused leave loading) from being employment termination payments. These payments are covered separately under Subdivision 83-A. Consequently, the payments in respect of unused annual leave and leave loading totalling are specifically excluded from being employment termination payments. The tax treatment of these payments will be dealt with later in this ruling. Paragraph 82-135(e) of the ITAA 1997 excludes the tax-free part of a genuine redundancy payment or an early retirement scheme payment worked out under section 83-170. Therefore, it is necessary to determine the extent (if any) to which the remaining payments (termination payment, redundancy payment and RDO accrual): · qualify as genuine redundancy payments; and · are excluded as the tax-free part of a genuine redundancy payment. Genuine redundancy payments A payment made to an employee is a genuine redundancy payment if it satisfies all criteria set out in section 83-175 of the ITAA 1997. This section states: (1) 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 dismissal. (2) A genuine redundancy payment must satisfy the following conditions: (a) the employee is dismissed before the earlier of the following: (i) the day he or she turned 65; (iii) 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 dismissal. (3) However, a genuine redundancy payment 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 the payment was received or at a later time. | Detailed Reasoning - Payments not covered: (4) A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)). The Commissioner has issued Taxation Ruling TR 2009/2, Income Tax: genuine redundancy payments . The Ruling provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997. In discussing what constitutes a genuine redundancy payment in accordance with subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states: 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. Therefore, the Commissioner considers that any payment must be made 'in consequence of' the employee's termination of employment before it can be a genuine redundancy payment. As noted in the facts, you were dismissed from employment in the fourth quarter of the 2011-12 income year, as a result of redundancy due to the employer's decision and to economic reasons. The payments representing termination payment, redundancy payment and RDO accrual were made 'in consequence of' your termination of employment due to your role being abolished. Accordingly, the payments were made in circumstances of genuine redundancy. However, only the payments representing the termination payment and the redundancy payment are in excess of the amount that could reasonably be expected to be received by you in consequence of voluntary termination. The remaining amount representing the RDO accrual would have been paid to you had you voluntarily terminated your employment. Consequently, this amount cannot be considered to be a genuine redundancy payment and will be taxed as a normal employment termination payment. In respect of the payments representing the termination payment and the redundancy payment it is accepted that all the conditions in subsection 83-175(1) of the ITAA 1997 have been satisfied. You were under the age of 55 years when your employment was terminated. There is no date prior to you attaining age 65 where you would have had to retire from your employment. The employer and yourself were dealing with each other at arm's length. There is no evidence to indicate that there was an arrangement between the employer and yourself, or the employer and another person, to employ you after the termination time. Furthermore, there is no evidence to indicate that any part of the termination and redundancy payments are in lieu of superannuation benefits to which you may have become entitled at the time of the payment or at a later time. Therefore, it is accepted that all the conditions in subsection 83-175(2) and subsection 83-175(3) of the ITAA 1997 have been satisfied in respect of the termination and redundancy payments. Consequently, this amount is considered to be a genuine redundancy payment. | Detailed Reasoning - Tax free amount: Section 83-170 of the ITAA 1997 applies to determine the tax-free treatment of a genuine redundancy payment. Section 83-170 places a limit on the amount of a genuine redundancy payment that is eligible for concessional tax treatment. So much of the genuine redundancy payment that does not exceed the amount worked out using the prescribed formula is not assessable income and is not exempt income. Under subsection 83-170(3) of the ITAA 1997, the formula for working out the tax free amount is: Base amount + (Service amount × Years of service) You commenced employment during the 2006-07 income year and were made redundant during the 2011-12 income year after a period of employment of a number of continuous years. Consequently the 'years of service' to which the genuine redundancy payment relates is the specified number of whole years of service. As your dismissal occurred during the 2011-12 income year, the base amount will be $A and the service amount will be $B. Therefore the tax-free amount calculated in accordance with subsection 83-175(3) of the ITAA 1997, is the tax free part of a genuine redundancy payment you can receive in the 2011-12 income year. As the payment made to you in lieu of notice and redundancy pay is below the tax-free amount of a genuine redundancy payment it should be shown at label D on your Payment Summary. The tax free amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997, therefore it is not required to be included in your income tax return for the 2011-12 income year. The payments made on termination of employment for RDO accrual and unused annual leave and leave loading will now be considered. | Detailed Reasoning - Taxation treatment of an unused annual leave payment: Subsection 83-10(2) of the ITAA 1997 includes as assessable income an unused annual leave payment you receive in the year of income. An unused annual leave payment is a payment that you received in consequence of the termination of your employment if: (a) it is for annual leave you have not used; or (b) it is a bonus or other additional payment for annual leave you have not used; or (c) it is for annual leave, or is a bonus or other additional payment for annual leave, to which you were not entitled just before the employment termination, but that would have been made available to you at a later time if it were not for the employment termination. Section 83-15 of the ITAA 1997 states: You are entitled to a *tax offset to ensure that the rate of tax on an *unused annual leave payment does not exceed 30%, to the extent that: (a) the payment was made in connection with a payment that includes, or consists of, any of the following: (i) a *genuine redundancy payment; (ii) an *early retirement scheme payment; (iii) the *invalidity segment of an *employment termination payment or *superannuation benefit; or (b) the payment was made in respect of employment before 18 August 1993. In the facts of this case, your entitlement to receive a payment for unused annual leave and leave loading is being made in connection with a genuine redundancy payment. Accordingly, this amount should be shown at label B on your Payment Summary. You are entitled to a tax offset to ensure that the rate of tax for the payment for unused annual leave of and leave loading does not exceed 30%. In addition, the Medicare levy may apply. | Detailed Reasoning - RDO Accrual: As noted earlier, the RDO accrual payment constitutes an employment termination payment, as all the conditions in section 82-130 of the ITAA 1997 have been satisfied. The RDO accrual payment is a taxable component of an employment termination payment. Therefore, this amount is to be included in your assessable income for the 2011-12 income year (subsection 82-10(2) of the ITAA 1997). As the payment is under the employment termination payment cap of $165,000 (subsection 82-10(4) of the ITAA 1997), you are entitled to a tax offset that ensures that the rate of income tax on the RDO accrual amount does not exceed 30% in accordance with subsection 82-10(3). In addition, the Medicare levy may apply.

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. | Relevant facts: In the 2006-07 income year, you commenced an apprenticeship with an employer (the employer) and on completion of your apprenticeship you were offered full-time permanent employment. | In a letter, the employer has certified the date you commenced employment and that, due to economic reasons, you were made redundant in the fourth quarter of the 2011-12 income year. Furthermore, under the National Employment Standards, individuals who are made redundant due to lack of work are entitled to receive a redundancy payment. The payment is determined by the period of continuous service. | You had completed a specified number of whole years of continuous service with the employer. | The employer made the redundancy payment to you based on an enterprise agreement (the Agreement). | As a result of the redundancy, under the Agreement you were entitled to a redundancy payment which included a specified number of weeks pay in lieu of notice and a specified number of weeks severance pay. | You were entitled to receive your RDO accrual, accrued annual leave and leave loading on resignation or retirement. | The employer advised that as a result of redundancy, your redundancy payment and final entitlements included a termination payment, redundancy payment, annual leave, leave loading and RDO accrual with an amount of tax withheld. | At the time of termination there were no arrangements between yourself and the employer or any other person to employ you after your termination of employment. | There was no date prior to your sixty fifth birthday when you were required to cease employment. | No part of the employment termination payment was made to you in lieu of superannuation benefits. | You are under the age of 55 years.