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Edited version of private ruling
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Ruling
Subject: Genuine redundancy payment - years of service
Question
Are all your client's years of service of with their employer relevant when calculating the tax-free part of a genuine redundancy payment?
Answer: Yes.
This ruling applies for the following period
Year ending 30 June 2009
The scheme commenced on
1 July 2008
Relevant facts
Your client was employed by their employer (the Employer) over multiple periods of time.
As a result of the Employer experiencing a significant drop in orders, there were more employees than required. Consequently, your client was offered, and accepted, a redundancy package.
Documents provided show that your client's payment was based on all the periods of your client's employment with the Employer.
A PAYG Payment Summary - employment termination payment shows that in the 2008-09 income year your client received a payment comprising a taxable component and an amount of tax was withheld.
A PAYG Payment Summary - individual non-business shows that a tax-free part of the genuine redundancy payment was calculated by the Employer based on only your client's last period of employment with the Employer.
You were also paid separate amounts for unused annual leave and unused long service leave.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 83-175.
Income Tax Assessment Act 1997 Subsection 83-175(1).
Income Tax Assessment Act 1997 Subsection 83-175(2).
Income Tax Assessment Act 1997 Subsection 83-175(3).
Income Tax Assessment Act 1997 Subsection 83-175(4).
Income Tax Assessment Act 1997 Section 82-135.
Income Tax Assessment Act 1997 Section 83-170.
Income Tax Assessment Act 1997 Subsection 83-170(3).
Income Tax Assessment Act 1936 Subsection 27A(1).
Income Tax Assessment Act 1936 Subsection 27A(19).
Income Tax Assessment Act 1936 Subsection 27F.
Reasons for decision
Summary
In this case, your client's payment was based on all periods of their employment with the Employer. This recognises the fact that the Employer took into consideration all the periods of your client's employment in making the payment.
The calculation of an employee's years of service relates to whole years. Where the years of service comprise more than one period, it is the number of whole years in each period of service that is used.
Detailed reasoning
Genuine redundancy payment (GRP)
The requirements for a payment to be a genuine redundancy payment (GRP) are outlined in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997).
In this case, it is accepted that the payment your client received from the Employer is a GRP in accordance with section 83-175 of the ITAA 1997.
Tax-free amount of a GRP
The tax-free amount of a GRP is not assessable income and not exempt income, as provided for in section 83-170 of the ITAA 1997. Any amount of a genuine redundancy payment in excess of this tax-free amount worked will be taxable as an employment termination payment. This is so even where the amount is received more than 12 months after the termination.
Under subsection 83-170(3) of the ITAA 1997, the formula for working out the tax free amount is:
Base amount + (Service amount x Years of service)
In calculating the tax-free limit for the 2008-09 income year:
Base amount means $7,350;
Service amount means $3,676; and
Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates.
The explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Act 2007 at paragraph 4.61 states:
The tax free part of a payment is determined by reference to a base amount plus an amount per year of service. This replicates the existing concession offered to such payments.
In discussing the meaning of the term years of service, the explanatory memorandum to the Taxation Laws Amendment (Superannuation) Act 1992 (the EM) which inserted the former subsection 27A(19) into the Income Tax Assessment Act 1936 states:
The relevant period of completed service is the same as the period defined in paragraph (a) of the definition of eligible service period in subsection 27A(1). That is, the period, or aggregate of the periods, of the employment to which the payment relates. However, eligible service period is expressed in days, while the service period for subsection 27A(19) purposes is expressed in whole years.
The EM goes on to provide an example on the calculation of the tax-free amount of a GRP and states:
Example
Bob commenced employment with Betty in July 1970. In August 1990 Bob took 2 years leave without pay. Bob recommenced employment in September 1992. He was made redundant in June 1995.
In view of his loyal service over the years, Betty paid him an ex-gratia payment of $50,000 in addition to his accrued superannuation benefits. The $50,000 is a BFRP.
The number of whole years of service to which the payment relates is:
· 20 years from July 1970 - August 1990; and
· 2 years from September 1992 to June 1995.
Therefore, the tax-free amount of the payment is:
$4,000 + [$2,000 x 22] = $48,000.
The remaining $2,000 will be split into the pre-July 1983 component and the post-June 1983 component based on Bob's eligible service period and taxed accordingly.
Generally, the years of service will be the employee's most recent continuous period of employment with the relevant employer making the employment termination payment. Non-continuous periods of employment with the employer or a related employer can be taken into consideration in calculating the years of service provided the employment termination payment is made in recognition of that earlier employment and/or related employment.
In this case, your client's payment was based on all the periods of their employment with the Employer. This recognises the fact that the Employer took into consideration all the periods of your client's employment in making the payment.
However, as mentioned above, the EM makes it clear that the calculation of an employee's years of service relates to whole years. Further, the example calculation above shows that where the years of service comprise more than one period, it is the number of whole years in each period of service that is used, rather than the sum of the days worked.
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