C2008-47 Voluntary Redundancy Payments

Status: not-current

New Commonwealth Government rules changed the treatment of payments made on termination of employment. Circular 2007-35 advised that the Department of Premier and Cabinet (DPC) was seeking a tax ruling to see if redundancy payments made under Premier's Memorandum 97-27 meet the transitional Employment Termination Payment (ETP) tax rules which commenced on 1 July 2007. Taxation advisers were engaged to assist with this request.

The Australian Tax Office (ATO) has advised that the Commissioner of Taxation is unable to issue a class ruling on this matter as each individual's termination of employment is subject to that individual's employment contract. The ATO has indicated that individuals need to apply to the Commissioner for their own Private Binding Ruling.

Alternatively, the taxation advisers suggest that some individuals may wish to record a redundancy payment as a transitional ETP in their tax return and lodge an objection if the ATO disagrees with the assessment.

When requesting a ruling or lodging an objection, the Commissioner should be asked to:

  • Confirm that the payment made as a consequence of the termination of employment is a transitional termination payment. The attached extracts from DPC's Tax Ruling application may assist in making individual applications for a Private Binding Ruling; and
  • Exercise the discretion available under section 82-130(5) of the Income Tax Assessment Act 1997 to ignore the 12 month limit specified in section 82-130(b) of the ITAA for the payment of ETPs.

Agencies should now seek payment instructions from affected former employees, and advise them that the payments will be taxed as ordinary (non-transitional) ETPs, or where the payments have been deferred for longer than 12 months, as ordinary income.

In some cases, there may be no difference in the tax rates applying to transitional and ordinary ETPs, depending on the individual's age and the amount of the redundancy payment. There is also no guarantee that the ETP could be rolled over into a superannuation fund even if the ruling or objection is favourable.

Former employees should be advised to seek their own independent financial advice on this matter.

John Lee
Director General

Issued: Public Sector Workforce Office
Contact: Robyn Parnell, Senior Adviser
Email: robyn.parnell@dpc.nsw.gov.au
Telephone no: 9228 4152 Facsimile: 9228 3622
File no: PSM/08528-02
Date: 24 November 2008

This circular supersedes Circulars 2007-35 and 2008-20.

Relevant extracts from DPC application for Tax Ruling


Public sector employees in NSW in a bona fide redundancy situation are entitled to a severance payment prescribed in NSW Ministerial Memorandum 97-27 of 2 October 1997 to be superseded in near future by a new Memorandum (“Memorandum”). All Memoranda represent a direction from the Premier to Ministers and their provisions must be applied by all NSW public sector agencies, except State Owned Corporations.

Most public sector employees are not employed under a written contract nor do awards applying to their employment conditions refer to entitlements to severance payments or the method of calculating the payment in a bona fide redundancy situation. Rather, these entitlements are prescribed in the Memorandum, which also prescribes other entitlements such as Job Assist Scheme.

It is relevant to note that the redundancy payments in the Premier's Memorandum form part of the contract of employment of public sector employees. The payments are acknowledged by the Government to be an entitlement of the employees and it is mandatory for all agencies other than State owned corporations to apply the entitlement in a redundancy situation.

In addition, the Memorandum provides guidance on the following areas:

  • the arrangements in place when an employee has been made redundant, for example, provision of financial assistance to the employee to seek alternative employment or obtain additional knowledge and skills;
  • how to calculate the amount of severance payment made to an employee upon redundancy.

The Memorandum is readily available and can be accessed by employees on the Department of Premier and Cabinet's website www.dpc.nsw.gov.au.


Part 2-40, Subdivision 82-A of the Income Tax (Transitional provisions) Act 1997, stipulates the conditions that must be satisfied in order for a life benefit termination payment (“LBTP”) to qualify under the transitional provisions. The necessary conditions are as follows:

  • the payment is made to an employee on or after 1 July 2007 and
  • the payment is received by the employee because the employee is entitled to it under a written contract, a law of the Commonwealth, a State, a Territory or another country, an instrument under such a law, or a workplace agreement within the meaning of the Workplace Relations Act 1996; and
  • the entitlement is provided for under that contract, law, instrument or agreement as in force just before 10 May 2006 (Section 82-10(1));
  • the payment is made to the employee before 1 July 2012 (Section 82-10(2)); and
  • the contract, law or agreement in force just before 10 May 2006 specifies the amount of the payment, or a way to work out a specific amount of the payment (Section 82-10(3)). Section 82-10(4) provides that a specific amount can be worked out in ways including either or both of the following:
  • by a method or formula for working out the amount;
  • by provision for the employer to make a choice between the forms of payments, allowing amounts to be worked out as provided by a specific formula.

We have outlined below details of the circumstances surrounding the severance payments to provide support for the conclusion that the severance payments made by the New South Wales government to public sector employees in NSW should be considered a life benefit termination payment pursuant to Part 2-40, Subdivision 82-A of the Income Tax (Transitional Provisions) Act 1997.

Reasons for the conclusion

In determining what constitutes a written contract, the Oxford English Directory defines “contract” to mean:
“1. a written or spoken agreement intended to be enforceable at law …”

Whilst the employment contract entered into by the employee with the NSW government does not contain a specific clause which provides for redundancy, it is mandatory for all agencies of the NSW government (other than State owned corporations) to apply the Memorandum. This Memorandum sets out the employees' entitlement to redundancy payments and the method to work out the amount of redundancy.

Given that NSW government agencies must apply the Memorandum and redundancy formula in the case of an employee's redundancy, it follows that the NSW Government treats the Memorandum as a binding commitment. As such, it represents a written contract with the employee, irrespective of any connection with the employment contract.

The Memorandum provides a method to calculate the amount of payment to an employee in the event of redundancy.

Therefore, it follows that employees who had entered into a written contract with the NSW Government at any time before 10 May 2006, had a written contract as at that date which provided an entitlement to a life benefit termination payment, and also specified a formula to work out that entitlement.

Accordingly, life benefit termination payments paid on or after 1 July 2007 and before 1 July 2012 in respect of NSW public sector employees who had entered into a written contract with the NSW Government at any time prior to 10 May 2006 should satisfy the requirements under the transitional provisions.

The Commissioner is requested to confirm that this is the case.