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Ruling
Subject
Genuine redundancy payment - Years of service
Issue
Question:
Are prior periods of employment with related entities to be taken into consideration in determining the 'years of service' in respect of the tax-free part of a genuine redundancy payment?
Answer:
Yes
This ruling applies for the following period
For the year ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts
Over 10 years ago, an employee (the employee), commenced employment with an employer (the employer).
A few years ago, the employee was transferred to a related entity of the employer.
In the third quarter of the 2011-12 income year, the employee was made redundant by the employer and received a redundancy payment.
The redundancy payment made in the 2011-12 income year to the employee relates to a period of service with the employer and prior service with its related entities.
The employee is under 65 years of age.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 82-10(3).
Income Tax Assessment Act 1997 Section 83-170.
Income Tax Assessment Act 1997 Section 83-175.
Reasons for decision
Summary
As the redundancy payment is based on the employee's entire service with the organisation the 'years of service' are the specified number of years for the calculation of the tax free amount. As the payment is below the tax-free amount of a genuine redundancy payment (GRP) it is not assessable income and is not exempt income therefore is not required to be included in the employee's income tax return for the 2011-12 income year.
Detailed reasoning
Tax-free treatment of this genuine redundancy payment
The Commissioner has issued Taxation Ruling TR 2009/2, titled Income tax: genuine redundancy payments. It provides useful guidance on the factors to be considered in the interpretation of section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997) and the tax free amount under section 83-170.
Paragraphs 69 and 70 of TR 2009/2 state:
· The extent to which the payment is tax-free will depend on the amount of the payment and the total number of whole years of employment to which the payment relates. There is no requirement for the years of service to be continuous when applying the threshold in section 83-170.
· 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.
In this case, an employee (the employee) commenced employment with an employer (the employer) over 10 years ago.
A few years ago, the employee was transferred to a related entity of the employer.
In the third quarter of the 2011-12 income year, the employee's employment was terminated by the employer due to a genuine redundancy.
The employee received a redundancy payment on termination of employment in the 2011-12 income year which relates to the employee's period of employment with the employer and the period of prior service with the related entity.
Consequently the years of service to which the genuine redundancy payment relates is over the specified number of years of service (that is, from the date the employee commenced employment with the related entity until the employee was made redundant in the 2011-12 income year.
For the 2011-12 income year, the base amount is $8,435 and the service amount is $4,218. Therefore the tax free amount calculated in accordance with subsection 83-175(3) of the ITAA 1997, is the tax free part of a genuine redundancy payment the employee can receive in the 2011-12 income year.
The tax free amount of the severance payment is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997.
As the redundancy payment made to the employee is below the tax-free amount of a GRP it should be shown at label D on the employee's Payment Summary. The tax free amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997 therefore is not required to be included in the employee's income tax return for the 2011-12 income year.
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