Circular 2007-35 advised that the Department of Premier and Cabinet was seeking a tax ruling on whether voluntary redundancy payments made between 1 July 2007 and 30 June 2012 meet transitional criteria which would enable them to be rolled over to a superannuation fund.

The Australian Tax Office (ATO) has not yet made a ruling.

The Circular also advised that these voluntary redundancy payments, known as Employment Termination Payments (ETPs), must be paid within 12 months of termination unless the ATO grants an extension. I am advised that an application to the ATO for an extension is unlikely to be successful.

Without an extension of time, ETPs paid after 12 months will be taxed as ordinary income at marginal tax rates instead of being taxed concessionally as ETPs. Therefore, employers should obtain fresh written instructions from those former employees who elected to defer payment nearly 12 months ago.

Former employees who deferred an ETP should seek independent financial advice on whether to continue deferring the ETP or have it paid. Former employees and their financial advisers may wish to consider the following four potential scenarios prior to making a decision:

1. the ETP is paid before the 12 months have elapsed and is taxed as an ETP;
2. payment of the ETP is deferred for longer than 12 months, the tax ruling is unfavourable, and the payment is taxed as ordinary income;
3. payment of the ETP is deferred for longer than 12 months, the tax ruling is favourable, and the payment can be rolled over into a superannuation fund; and
4. where the former employee is employed and has the option to salary sacrifice, the ETP is paid before the 12 months have elapsed and is taxed as an ETP, and an amount is sacrificed into superannuation.

A further Circular will be issued when the tax ruling has been made. 

(signed)

Robyn Kruk
Director General