Edited version of your written advice

Authorisation Number: 1012731026452

Ruling

Subject: Genuine redundancy payment

Question

For the purposes of calculating the tax-free amount of a genuine redundancy payment under subsection 83-170(3) of the Income Tax Assessment Act 1997 (ITAA 1997) does 'years of service' include your period of employment with an overseas affiliate?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

In the 2013-14 income year your employment with your employer (the Australian Company), with whom you had worked for several years, was terminated.

Prior to that employment, you worked overseas as the Managing Director of an overseas affiliate of the Australian Company.

You have provided a copy of the employment contract (the Agreement) made between yourself and the Australian Company.

A particular subclause of the Agreement states that you will perform duties as for the overseas affiliate but remain solely employed by the Australian Company. You were expected to spend an approximate amount of your time managing the business of the Australian Company and the remainder of your time managing the business of the overseas affiliate.

Another subclause of the Agreement states that the period where you worked overseas will be regarded as service with the Australian Company excluding any entitlement, if any, to long service leave.

Another subclause of the Agreement states that for the purpose of calculating continuous service for leave entitlements (excluding any entitlement, if any, to long service leave), your period of overseas service will be recognized.

During the 2013-14 income year, you received a letter from the Australian Company confirming that your position had been made redundant. The letter also states that you will receive a genuine redundancy payment equivalent to a number of weeks' pay on the basis that the Agreement deemed your service with the Australian Company to have commenced on your start date with the overseas affiliate.

You provided your PAYG payment summary - employment termination payment for the year ended 30 June 2014 which showed that the tax-free limits to your redundancy payment were only applied to the completed years of your Australian employment.

You are under 55 years of age.

Relevant legislative provisions

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).

Income Tax Assessment Act 1997 section 83-175.

Reasons for decision

Summary

Based on the information provided, the calculation of the 'years of service' in relation to your genuine redundancy payment will include your overseas period of service because the payment is made in respect of your total years of service with the employer.

Detailed reasoning

Tax-free treatment of a genuine redundancy payment

A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all criteria set out in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997).

The character of the payment as a GRP is not in question in this case.

Section 83-170 of the ITAA 1997 applies to determine the tax-free treatment of a GRP.

Tax-free treatment of a GRP

Subsection 83-170(2) of the ITAA 1997 provides that so much of the GRP that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is not assessable income and is not exempt income.

The formula for working out the tax-free amount is:

Base amount + (Service amount x Years of service)

where '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 purposes of subsection 83-170(3) of the ITAA 1997, the base amount for the 2013-14 income year is $9,246 and the service amount is $4,624. Any amount that the taxpayer receives which falls below this limit will attract no tax, that is, such an amount will be tax-free.

Calculation of 'years of service'

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 ITAA 1997 and the tax free amount under section 83-170 and provides the following in relation to the 'years of service'.

Paragraphs 69, 70 and 71 of TR 2009/2 state:

69. 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.

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.

Where an employer makes the payment in consequence of the termination of employment, the 'years of service' is the period, including the recognition of any earlier years of service of the employment, to which the payment relates.

Generally, the 'years of service' will be the person's most recent continuous period of employment with the relevant employer making the employment termination payment. Non-continuous period of employment with the employer or a related employer can be taken into consideration in calculating the 'years of service' provided the eligible termination payment is made in recognition of that earlier employment and/or related employment.

In your case, you were employed by the Australian Company for a period of time. Prior to that employment, you were employed with an overseas affiliate of the Australian Company. 

You have provided a copy of the employment contract (the Agreement) made between yourself and the Australian Company.

Under the terms of the Agreement you were required to perform duties for the affiliate's business but remained solely employed by the Australian Company. The employer expected that an approximate amount of your time would be spent managing the Australian Company's business, and remainder of the time managing the affiliate's business, although that could change over time.

Furthermore, at a subclause of the Agreement it states that the period where you worked overseas will be regarded as service with the Australian Company excluding any entitlement, if any, to long service leave.

Furthermore, in the Agreement it states that for the purpose of calculating continuous service for leave entitlements (excluding any entitlement, if any, to long service leave), your period of overseas service will be recognised.

As such, even though you completed a number of years of overseas employment, in accordance with a subclause of the Agreement, your overseas period of service is recognised and regarded as service with the Australian Company.

This was confirmed in a letter from the employer in the 2013-14 income year which stated that you will receive a genuine redundancy payment equivalent to a number of weeks' pay on the basis that the Agreement deemed your service with the Australian Company to have commenced on your start date as the Managing Director of the overseas affiliate.

Since the genuine redundancy payment of for the number of weeks was calculated from your start date with the overseas affiliate, the period attributable to your overseas employment will be included in the calculation of the 'years of service'.

It should be noted that years of service refers to each whole year of completed employment service to which the redundancy payment relates; 6 months, 8 months or even 11 months do not count as a whole year for the purpose of this calculation.

In accordance with subsection 83-170(3) of the ITAA 1997, the tax-free part of a GRP you can receive in the 2013-14 income year equals:

$9,246 + ($4,624 x whole years of service) 

As the genuine redundancy payment you received does not exceed the tax-free amount calculated above, the whole of the genuine redundancy payment is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997.

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