Private ruling: Genuine redundancy
Published: December 2012
Ruling period: For the year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is any part of the total payment your client received, a tax-free part of a genuine redundancy payment (GRP) in accordance with section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: In 200X, (your client) commenced employment with (the Company). In the relevant year, your client ceased employment with the Company. An official letter of termination was never provided to your client by the Company. In the relevant year, voluntary administrators were appointed to the Company. In the subsequent year, the Liquidator of the Company advised that an amount representing your client's entitlements (including payment in lieu of notice and redundancy) was paid to your client (payment 1). In the subsequent year, the Liquidator of the Company advised that a further amount representing your client's entitlements (including unpaid wages, annual leave, leave loading and long service leave) was paid to your client (payment 2). Your client has completed a specific number of whole years of service with the Company. There was no date prior to your client's 65 th birthday when your client was required to cease employment. There was no arrangement between your client and the employer, or the employer and another person, to employ your client after the date of termination. No part of the payment was made to your client in lieu of superannuation benefits. Your client is under 65 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-135. | Income Tax Assessment Act 1997 Section 83-170. | Income Tax Assessment Act 1997 Section 83-175.

Reasons for decision: Summary: Payment 1 made to your client in lieu of notice and redundancy, is considered to be a genuine redundancy payment (GRP). As the payment is below the tax-free amount of a GRP, it is not assessable income and is not exempt income. Therefore, no part of this payment is required to be included in your client's income tax return for the subsequent income year. Payment 2 made to your client representing unused annual leave, leave loading and unused long service leave are to be included in your client's assessable income for the subsequent income year, but will be taxed concessionally. | Detailed Reasoning - Genuine redundancy payments: A payment made to an employee is a genuine redundancy payment (GRP) 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; (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 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. 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)). As noted in the facts, your client's employment was terminated due to the Company going into liquidation and voluntary administrators of the Company appointed. As a result, your client's position was made redundant and a payment in lieu of notice, as well as a redundancy amount, was advanced to your client (payment 1). This payment received by your client was paid in circumstances of genuine redundancy and is in excess of the amount that could reasonably be expected to be received by a worker in consequence of voluntary termination. Therefore, it is accepted that all the conditions in subsection 83-175(1) of the ITAA 1997 have been satisfied. At the time of termination, your client was under 65 years of age. There is no date prior to your client attaining age 65 where your client would have had to retire from your client's employment. The employer and your client were dealing with each other at arm's length and there was no arrangement between your client and the employer, or the employer and another person, to employ your client after the date of termination. Furthermore, there is no evidence to indicate that any part of the payment is in lieu of superannuation benefits to which your client 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. 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 (apart from paragraph 82-135(e)). Section 82-135 of the ITAA 1997 includes payments such as pensions, foreign termination payments, unused annual leave and unused long service leave. Payments for unused annual leave are expressly mentioned in paragraphs 82-135(c) of the ITAA 1997. The payments for accrued annual leave and long service leave were made to your client in addition to the redundancy payment and payment in lieu of notice (payment 2). Therefore, payment 1 received by your client in lieu of notice and redundancy does not include the unused leave payments. Hence the requirement in subsection 83-175(4) of the ITAA 1997 has been satisfied. In light of the above, as all the conditions have been satisfied in accordance with section 83-175 of the ITAA 1997, the redundancy payment and payment in lieu of notice made to your client is considered to be a GRP. | Detailed Reasoning - Tax free amount: Section 83-170 of the ITAA 1997 applies to treat so much of the GRP (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 83-170(3) of the ITAA 1997, the formula for working out the tax free amount is: Base amount + (Service amount × Years of service) Your client's tax-free part has been calculated in accordance with subsection 83-170(3) of the ITAA 1997. As the payment made to your client in lieu of notice and redundancy is below the tax-free amount of a GRP, the entire amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997. Therefore your client's income tax return for the subsequent income year will not include any part of the total GRP (in lieu of notice and redundancy) paid to your client. | Detailed Reasoning - Unused annual leave and accrued long service leave payments: On termination of employment your client received a payment of unused annual leave, leave loading and unused long service leave (payment 2). These payments are to be included in your client's assessable income for the subsequent income year. As these payments were made in connection with a genuine redundancy your client is entitled to a tax offset to ensure that the rate of tax for these payments does not exceed 30% plus Medicare Levy. | Detailed Reasoning - Conclusion: Payment 1 made to your client in lieu of notice and redundancy is considered to be a GRP. As the payment is below your client's tax-free amount of a GRP it is not assessable income and is not exempt income. Therefore, no part of this payment is to be included in your client's income tax return for the subsequent income year. Payment 2 made to your client representing unused annual leave, leave loading and unused long service leave is to be included in your client's assessable income for the subsequent income year. In your client's case, these payments will be subject to concessional tax treatment.

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