I've been made redundant from a small business and received a 4-week PILON plus the balance of annual leave owed. No actual redundancy payment, which I know they are not obliged to pay based on the size of the business.
I have received final pay advice and note that I have been taxed the full amount on the PILON (though this is not itemised).
Based on my reading of the ATO site and the fact this is a genuine redundancy, I believe the annual leave portion is not tax free but the PILON is?
@PayrollDeanne you said in a previous post that it might be discretionary: "If PILON wouldn't be paid in your business or industry upon voluntary cessation, then you may assess it to be part of the genuine redundancy. It's not a fixed thing, it depends. Sometimes yes, sometimes no, as per the ATO TR 2009/2 P64."
When I raised the issue with the boss it was referred to their accountant, who responded with the following (on which I call bulls... ).
"A payment in lieu of notice is distinct from genuine redundancy. They are treated as separate items.
Redundancy pay (which can be partially tax-free) is not required in this case because xxxxx is a small business (fewer than 15 employees). Therefore, no redundancy pay is included.
Payment in lieu of notice is treated as a taxable component of Employment Termination Payment (ETP). Employers are legally required to withhold tax when processing this payment.
For your reference, please see:
The tax withheld is part of xxxxxx's PAYG withholding obligations. When employee lodge their tax return, the ATO will recalculate the final tax based on the total income for the year, and any excess withholding will be refunded.
Additionally, under the terms of the employment contract, xxxx have to pay four weeks’ payment in lieu of notice when terminating employment."
A quote from my contract is then supplied, which states under "Termination" that the business "can exercise the option of paying you four weeks' gross salary in lieu of notice."
Can you please advise what best to tell them or what part of the ATO guidelines to show them? I'm no accountant, and the more I read the more confused I become. I just want proof (if available!) to support my argument, which has so far been dismissed.
Many thanks,
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Hiya @Mackenzie25 👋
This trips up many employers! It's all about understanding the use of the SAME terminology by DIFFERENT regulators: "redundancy pay". For ATO "redundancy pay" is more than just a specific payment 🤓
Firstly, the Fair Work Act 2009 S117 defines when PILON is payable. Specifically, S117(2)(b) makes it very clear that if the employer doesn't want the employee to work out their notice, they must pay PILON. S121(1)(b) defines when a "redundancy payment" in S119 is not payable. It is only saying that the severance component in S119 to compensate you for the loss of your job is not payable by small businesses. It doesn't say that small business doesn't have to pay PILON. That's all correct and your accountant agrees on these facts.
Now, the ATO instructs how these payments are to be classified, based upon a range of circumstances that include reason for termination, age of employee in relation to various legislative dates, period of accrual of leave and other factors.
Your accountant has mistaken the facts of TR 2009/2 paragraphs 55-72, a "genuine redundancy" payment may include PILON, redundancy pay, ex-gratia, unused personal leave etc. It is about identifying, of all the payments made upon termination, which ones would NOT have been paid had you voluntarily resigned. Specifically, in paragraph 55, step 2 it states:
Determine the extent to which the remaining amounts (some or all) may be genuine redundancy payments.
To do this, deduct the amount that could reasonably be expected if the employee had voluntarily terminated their employment.
If your small employer would pay you out PILON if you resigned, then your accountant has correctly treated the PILON for tax purposes. (this is why my earlier post said, sometimes yes, sometimes no). However, if your small employer ONLY paid you PILON because they made your position redundant, then PILON is included in the tax-free part of the genuine redundancy 😉
Also, I assume your accountant has correctly paid super guarantee on the PILON, even though they did misclassify it, as per the ATO instructions?
Given that your accountant isn't familiar with the ATO requirements for termination payments, encourage them to reach out to their accounting association to confirm the above detail.
Deanne
Amazing, thank you so much @PayrollDeanne for this detailed advice - it brings the whole thing together for me. And yes they did pay super on the PILON - they did at least get that right.
With grateful regards,
Hi @PayrollDeanne,
They are playing hardball. I might be just thinking creatively, but could the fact that my contract describes a PILON upon resignation as discretionary support my case that the employer has the discretion to treat the PILON upon termination as a genuine redundancy payment?
My contract says (my bold emphasis): This agreement can be terminated by you giving eight weeks’ notice in writing. xxxxx may at its discretion reduce this period notice by giving you up to four week’s gross salary in lieu of notice.
I put your argument (de-identified and de-platformed) to the employer, and this is the accountant's reply today:
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"We confirm that the payment in lieu of notice has been treated correctly for tax purposes.
1. Genuine Redundancy Rules
Under s.83-175 ITAA 1997, only amounts that would not reasonably be expected on voluntary resignation can be treated as tax-free genuine redundancy. The Commissioner’s guidance in TR 2009/2 (paras 55–72) reinforces this principle. As the employment contract allows PILON on resignation, the payment does not satisfy this condition and cannot be included in the tax-free redundancy amount.
Conditions for a tax-free genuine redundancy payment
For completeness, the legislation sets out that a genuine redundancy payment must satisfy all of the following (s.83-175 ITAA 1997):
- The dismissal must be because the employee’s position is genuinely redundant.
- The employee must be under the age limit for retirement.
- At the time of dismissal, there must be no arrangement for the employee to be re-employed after the redundancy.
- The amount paid must be more than what the employee would have received if they had resigned voluntarily (e.g. ordinary notice pay, annual leave, long service leave are excluded). Only the additional amount that arises because of redundancy counts as a GRP.
- The payment must be made at arm’s length.
2. Reply to TR 2009/2(para 55-72) argument
- Paragraphs 55–72 describe the method for calculating the genuine redundancy component, which requires deducting any amounts an employee could reasonably be expected to receive on voluntary termination.
- xxxxxx’s employment contract provides for PILON when employment is terminated by the business, which is an amount that an employee could reasonably expect to receive on voluntary termination. Hence, it is an entitlement that not included in the tax-free redundancy calculation.
- Accordingly, under s.83-175(1) ITAA 1997 and TR 2009/2, the payment would not form part of the tax-free redundancy amount.
3. Withholding Obligation
Employers are required to withhold tax from Employment Termination Payments under TAA 1953 Sch 1, s.12-85. The applicable rates are set out in the Legislative Instrument – PAYG Withholding Schedule 11: Schedule 11 – ETP tax table
This means the withholding applied to the PILON is not discretionary but required by law.
Note on xxxx's concerns
We understand that xxxx concerns for termination payments to be tax-free. While PILON is legally treated as a taxable ETP, the ATO will review the total income position when she lodges the tax return. If more tax has been withheld than the final liability, the excess will be refunded at that stage. This ensures that the final outcome is fair and consistent with the individual’s overall tax position."
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@PayrollDeanne Would you agree that in this case the employer has the discretion to pay this as a lump sum according to ATO rules?
I think I am going to lose this fight, but I want to know if it's because my employer chose this path.
Kind regards,
No, this is confirming that you MAY have been paid PILON upon resignation, therefore, it doesn't meet the condition discussed. They are saying they would have paid it upon resignation, supported by your employment contract. So, they've treated it correctly 😉 as per the option in my original response 🤓 As I said, sometimes yes, sometimes no. In your specific contractual circumstances, no 😵 Deanne
@PayrollDeanne
Hi Deanne, many thanks for clarifying - I can at least now move on.
Really appreciate your time and sage advice.
