Edited version of private ruling

Authorisation Number: 1011571517164

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Ruling

Subject: Genuine redundancy payment

Question:

Do the completed years of service for the purpose of determining the tax free amount of a genuine redundancy payment include earlier years of service in relation to previous employers?

Answer:

Yes

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts:

You have been employed by various associated entities for many years.

Notwithstanding the change of entity as an employer, your employment remained unchanged through the whole period. Your duties remained the same and you took instructions from the same people.

You were advised by the employer that your position could not continue due to a reduction in the assets and a consequent reallocation and re-organisation of functions for their administration. As a consequence, you were offered a redundancy package.

You accepted the redundancy offer, and your employment was terminated.

A Deed of release (the Deed) affirms that a bona fide redundancy payment will be made by the employer.

A written statement made by the director confirms, when transferring your employment from one company to a sister company, your statutory benefits would run into the new company.

A letter from the employer confirms the settled amount of the genuine redundancy payment is a negotiated figure by considering a range of factors which include the length of your service with the various entities, the seniority of your position, etc..

You did not enter any written employment contracts with the employer or previous employers.

You are under 65 years of age.

This ruling is given on the basis of the facts stated in the description of the scheme as set out above. Any material variation from these facts (including any matters not stated in the description above and any departure from these facts) will mean that the ruling will have no effect. No entity will then be able to rely on this ruling as the Commissioner will consider that the scheme has been implemented in a way that is materially different from the scheme described.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 83-170

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 you includes the earlier period of services with previous associated entities.

Based on this, an amount is recognised as the tax free part of the genuine redundancy payment. This amount is non-assessable, non-exempt income. As your previous employer has deducted tax on incorrect years of service, you should make reference to this ruling when lodging your income tax return.

Detailed reasoning

Tax-free treatment of a genuine redundancy payment

Section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to determine the tax free treatment of a genuine redundancy payment. It states:

(1) This section applies if you receive a genuine redundancy payment or an early retirement scheme payment.

(2) So much of the relevant payment as does not exceed the amount worked out under subsection (3) is not assessable income and is not exempt income.

(3) Work out the amount using the formula:

Base amount + (Service amount × Years of service)

where:

base amount means:

(a) for the income year 2006-2007 - $6,783; and

(b) for a later income year - the amount mentioned in paragraph (a) indexed annually.

service amount means:

(a) for the income year 2006-2007 - $3,392; and

(b) for a later income year - the amount mentioned in paragraph (a) indexed annually.

years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates.

For the purpose of calculating the tax free part of a genuine redundancy payment for the 2009-10 income year, base amount is $7,732; and service amount is $3,867.

In your case, you received a genuine redundancy payment from the employer.

Thus, any amount that you received which falls below the limit determined under subsection 83-170 (3) of the ITAA 1997 will attract no tax. That is, such an amount will be tax free.

Years of service

As noted early, where a genuine redundancy payment is made to an employee in consequence of the termination of employment, the years of service is the number of whole years in the period, or the aggregate of the periods, of the employment to which the payment relates.

Taxation Ruling TR 2009/2, Income tax: genuine redundancy payments, provides guidelines to ascertain the years of service under section 83-170 of the ITAA1997.

Paragraphs 70 and 71 of TR 2009/2 state:

70. If earlier years of service with a previous employer are carried over and acknowledged on commencement with a new employer that later makes a redundancy payment to an employee, those years of service can be included in working out the tax-free amount of the genuine redundancy payment.

71. For example, this enables earlier years of service with employers within a group of entities to be recognised when an employee is ultimately terminated from one of the employers in the group. Recognition of previous service within the group in working out the termination payment should be documented by the terminating employer.

Clearly from the foregoing, only if the termination payment is made in recognition of earlier employment with a previous employer, the earlier years of service with this employer will be included in working out the tax free amount of a genuine redundancy payment.

In this case, you have been employed by various associated entities for many years.

Notwithstanding the change of entity as an employer, your employment remained unchanged through the whole period, your duties remained the same and you took instructions from the same people.

A statement made by the director confirms, when transferring your employment from one company to a sister company, he advised you in a conversation that your statutory benefits would run into the new company.

It is evident that you used to be employed by various associated employers, and your statutory benefits in relation to those employments were recognised by the employer that later made the redundancy payment to you.

Furthermore, the facts provided in the letter from the employer confirm that the settled amount of the genuine redundancy payment is a negotiated figure by considering a range of factors which include the length of your service with the various entities, the seniority of your position, etc.. In the light of this, the earlier years of service have been considered during the negotiation of the genuine redundancy payment.

Thus, the period of completed service to which the genuine redundancy payment relates should include the earlier period of services with previous associated entities.

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.

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