Edited version of private ruling

Authorisation Number: 1011536926832

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Ruling

Subject: Genuine redundancy payment - Years of service

Question

Do the completed years of service for the purpose of determining the tax free amount of a genuine redundancy payment include an earlier non-continuous period of service with the employer making the payment?

Answer: Yes

This ruling applies for the following period:

Year ended 30 June 2009

The scheme commences on:

1 July 2008

Relevant facts and circumstances

Your client rejoined the employer after ceasing the employment relationship for a few years.

Due to a change of the employer's production schedule, there were more employees than needed by the employer. As a consequence, your client was offered a redundancy package.

Your client accepted the redundancy offer, and their employment was terminated.

A termination pay summary prepared by the employer indicates the payment made to your client relates to their aggregate period of employment.

An amended PAYG payment summary - individual non-business issued to your client by the employer discloses a tax-free amount of the genuine redundancy payment was in relation to their recent years of service only.

Your client is under 65 years of age.

Your client and the employer are not related parties.

Your client has not lodged an income tax return for the relevant income year.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 27A(1)

Income Tax Assessment Act 1997 Part 2-40

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Section 82-150

Income Tax Assessment Act 1997 Section 82-155

Income Tax Assessment Act 1997 Section 83-170

Income Tax Assessment Act 1997 Subsection 83-170(2)

Income Tax Assessment Act 1997 Subsection 83-170(3)

Reasons for decision

Summary

The years of service in relation to the genuine redundancy payment made to your client is consistent with the eligible service period of their employment. This period of employment includes an earlier non-continuous period of service.

Based on this, part of the genuine redundancy payment is recognised as the tax free part. This amount is non-assessable, non-exempt income. It is not an employment termination payment.

The remaining amount of the payment is an employment termination payment and includes taxable component. This taxable component must be included in your client's assessable income for the relevant income year.

Detailed reasoning

Taxation of genuine redundancy payments

Your client received a genuine redundancy payment during the income year.

A genuine redundancy payment comprises a tax free amount and an assessable amount (section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)). The tax free amount is non-assessable, non-exempt income. The amount in excess of the tax free amount is assessable as an employment termination payment.

Accordingly, the payment to your client is made up of a tax free part and an assessable part.

Regarding the tax free part, the employer is not required to withhold any tax, and your client does not need to declare it in their income tax return for the relevant income year.

However, the assessable part is considered an employment termination payment which needs to be declared in your client's income tax return for the relevant income year.

From 1 July 2007, Part 2-40 of the ITAA1997 provides for the taxation of termination payments from an employer.

According to subsection 83-170(3) of the ITAA 1997, the tax free amount for the 2008-09 income year can be worked out by the formula:

Base amount + (service amount × years of service)

where:

base amount is $7,350 for the 2008-09 income year;

service amount is $3,676 for 2008-09 income year;

Years of service

In the formula above, years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates (subsection 83-170(3) of the ITAA 1997).

For the purposes of clarifying how 'years of service' are calculated, ATO Interpretative Decision 2003/523 (ATO ID 2003/523) states:

For the purposes of subsection 27A (19) of the ITAA 1936, 'years of service' are the number of whole years in the eligible service period (ESP) of the eligible termination payment (ETP).

Although ATO ID 2003/523 refers to the former ITAA, the definition of ESP is predominantly the same in both the 1936 and 1997 Acts. Therefore, the definition of eligible service period in subsection 27A (1) of the Income Tax Assessment Act 1936 (ITAA 1936) and relevant Taxation Rulings do provide additional guidance in the present case.

Eligible Service Period

Eligible service period is defined in subsection 27A (1) of the ITAA 1936 as:

eligible service period, in relation to an eligible termination payment (in this definition referred to as the "relevant eligible termination payment") means -

(a) where the relevant eligible termination payment is an eligible termination payment by virtue of paragraph (a) or (aa) of the definition of "eligible termination payment" - the period, or the aggregate of the periods, of the employment to which the relevant eligible termination payment relates;

Therefore, where a payment is made to an employee in consequence of the termination of his or her employment, the eligible service period (ESP) is the period, or the aggregate of the periods, of the employment to which the payment relates.

Taxation Ruling IT 2168 (IT 2168) provides guidelines to ascertain the ESP of a person receiving an ETP. Paragraph 4 of IT 2168 states:

Where an eligible termination payment (ETP) is made in consequence of the termination of a person's employment, the eligible service period is the period, or the aggregate of the periods, of the employment to which the ETP relates. Whether an ETP "relates" to particular employment is a question of fact in each individual case. It is to be taken that the eligible service period is the persons total period of most recent continuous service with the employer making the payment (or contributing to the superannuation fund making the payment) and any related employer or employers (including any employer entity taken over by the employer or related employer or any entity in a sequence of takeovers ending with the takeover by the employer or related employer), unless there is evidence that shows that the payment was made in recognition of a different period of employment. (bold emphasis added).

Clearly from the foregoing, only if the ETP is made in recognition of earlier employment with a related employer, the periods of employment with a related employer can be taken into consideration.

In the present case, your client rejoined the employer after ceasing the employment relationship for a few years.

A termination pay summary prepared by the employer confirms the payment made to your client relates to their aggregate period of employment.

Thus, the period of completed service to which the genuine redundancy payment relates is consistent with the ESP which is the aggregate period of the employment to which the ETP relates.

Based on this, part of the genuine redundancy payment is recognised as the tax free part in accordance with subsection 83-170 (3) of the ITAA 1997. This amount is non-assessable, non-exempt income. It is not an employment termination payment.

The remaining amount of the payment is an employment termination payment and includes taxable component. This taxable component must be included in your client's assessable income for the relevant income year.

Further information

The facts of this case indicate that the employer has already withheld tax from the tax free part of a genuine redundancy payment. Consequently, your client will potentially receive a refund from the Commissioner of any amount withheld to the extent that it exceeds their tax liability for the relevant income year.

Your client has not yet lodged their income tax return for the income year. They need to include a letter in their income tax return stating that they have a Private Ruling, quote the reference number of the ruling, and it has been determined that $X of the genuine redundancy payment is the tax free amount.

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