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A new draft ATO ruling clarifies when a genuine redundancy payment can be tax free (up to the relevant limit). The limit is worked out under section 83—170 of the Income Tax Assessment Act 1997.
The ATO's views in the Draft Ruling apply to many different circumstances. Of particular interest to some ClearLaw readers will be the tax treatment of payments to company directors who decide to sell, or close down, the company's business and so bring their own employment to an end.
The ruling is in Draft Taxation Ruling TR 2008/D6 (Draft Ruling).
There are 4 requirements for a genuine redundancy payment:
The ATO's view is that the dismissal of the employee:
As a director (or any "dual capacity employee") a person can often influence the decision as to whether their own employment should be terminated. This potential to influence the decision threatens the requirement discussed above, that the termination must be without the employee's consent.
However, the ATO considers that if the employer's act or decision that leads to the termination is dictated by legal or economic compulsion, then the dismissal will be a valid dismissal and the payment will be treated as a genuine redundancy.
The ATO gives a number of examples in which it indicates whether a director's (or other dual capacity employee's) participation in a decision to terminate his or her employment will or won't result in a genuine redundancy. The ATO's examples make it clear that:
There are further conditions for a genuine redundancy, which must be kept in mind. Particularly relevant to a dual capacity employee is the arm's length requirement — the termination payment must not be more than could reasonably be expected in an arm's length relationship.
Normally the arm's length limit on a payment would be the amount of redundancy payments the employee is entitled to under the law. — But the employer may still be able to pay an ex gratia tax free redundancy payment as a genuine redundancy payment if:
However, if the employee receives a payment that is greater than what could be expected, then the whole payment is disqualified from being a genuine redundancy payment.
The ATO has invited comments on the Draft Ruling to the ATO by 10 October 2008.
Paul is a Special Counsel in the Maddocks Commercial team with particular expertise in commercial agreements for the supply of goods and/or services, the Personal Property Securities Act 2009, the National Consumer Credit Protection Act 2009 and the National Credit Code and the Australian Consumer Law.
Paul's key areas of practice include:
Before joining Maddocks, Paul was employed for 13 years with the Victorian Department of Justice, principally as a Deputy Registrar in the Victorian Magistrate's Court, but also as a legislation, policy and project officer for the Department.
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