Edited version of your written advice

Authorisation Number: 1051247928559

Date of advice: 13 July 2017

Ruling

Subject: Tax-free treatment of genuine redundancy payments

Issue

Tax-free treatment of genuine redundancy payments

Question

Will prior years of service which are not recognised by the Taxpayer’s employer, be used for the calculation of the tax-free component of a genuine redundancy payment?

Answer

No

This ruling applies for the following periods

The income year ended 30 June 2016

The scheme commences on

1 July 2015.

Relevant facts and circumstances

In the 1982-93 income year the Taxpayer commenced employment with Employer A.

In the 2005-06 income year the Taxpayer moved to Employer B.

An employment separation certificate shows that the Taxpayer voluntarily ceased working for Employer A.

The move from Employer A to Employer B was conditional on the transfer of the Taxpayers long service leave entitlements, service status and superannuation service status.

The Taxpayer has provided a copy of the Taxpayer employee leave summary which notes the Taxpayers service and recognition of long service leave from Employer A.

A Contract of Employment between the Taxpayer and Employer B (the Contract) states that:

● for the purposes of calculating the Taxpayer’s entitlement to Long Service Leave the Taxpayer’s continuous service with Employer A (and its predecessors) will be taken into account.

● for the purposes of calculating the Taxpayer’s continuity of service or service-related entitlements, other than Long Service Leave, the Hire Date will be used.

The Contract shows the Taxpayer’s Hire Date when the Taxpayer commenced work at Employer B.

At the end of the 2015-16 income year, the Taxpayers employment with Employer B was terminated by reason of redundancy.

The Deed of Release between the Taxpayer and the Employer B made in the 2015-16 income year states:

● The Taxpayer was employed by Employer B in the 2005-06 income year. (the Employment).

● Without admission of liability, the Employer and the Taxpayer have agreed to settle all matters relating to the Employment, including the Restructure, the Redundancy and the Leave (Employment Matters), on the terms contained in this Deed.

The 'Years of service’ period for the purpose of calculating the tax-free amount of the Taxpayer’s genuine redundancy payment was calculated by the Employer as being the period of employment at Employer B.

The Employer did not take into account the Taxpayer’s employment at Employer A which the Taxpayer believes should have been included in the relevant years of service.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 27A(19).

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.

Income Tax Assessment Act 1997 subsection 83-175(1).

Reasons for decision

Summary

The 'Years of service’ is defined as the number of whole years in the period of employment in which the genuine redundancy payment relates to. In this case, that period of employment is the date at which the Taxpayer commenced employment at Employer B and was terminated by Employer B.

Detailed Reasoning

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). This section states:

(1) A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee’s position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of dismissal.

(2) A genuine redundancy payment must satisfy the following conditions:

(a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) if the employee’s employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach the age or complete the period of service (as the case may be);

(b) if the dismissal was not at arm’s length - the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm’s length;

(c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after dismissal.

(3) However, a genuine redundancy payment does not include any part of a payment that was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later time.

Payments not covered

(4) A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

Under subsection 83-175(1) of the ITAA 1997, a GRP is a payment resulting from:

(i) a dismissal;

(ii) the employee’s position is genuinely redundant; and

(iii) the payment exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the dismissal.

In this case, the termination of the Taxpayers employment is accepted as a redundancy. The Taxpayers employment was terminated following a decision made by the Employer to make the Taxpayers position redundant.

Tax-free amount of a Genuine Redundancy Payment

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) of the ITAA 1997 is not assessable income and is not exempt income.

In accordance with subsection 83-170(3) of the ITAA 1997, the formula for working out the tax-free amount is:

Base amount + (Service amount × 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, for the 2015-16 income year the Base amount is $9,936 and the Service amount is $4,969. Any amount that an employee receives which falls below this limit will attract no tax, that is, such an amount will be tax-free. In relation any amount of a GRP which exceeds the tax-free amount, it is taxed as an employment termination payment.

The extent to which the payment is tax-free will depends 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 of the ITAA 1997.

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.

Paragraphs 69 and 70 of TR 2009/2 states:

69. The extent to which the payment is tax-free will ordinarily 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.

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.

Generally, the years of service will be the employee’s most recent continuous period of employment with the relevant employer making the 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 payment is made in recognition of that earlier employment and/or related employment.

Although the Employer has acknowledged the Taxpayer’s service with Employer A, the Employer has determined that period of employment to which the payment relates is with the Taxpayer’s period of employment with Employer B.

In addition, the Contract also states that for the purposes of service related entitlements other than long service leave, the Hire Date would be used. The Hire Date under the Contract is the date the Taxpayer commenced employment with Employer B.

Further, the Deed under which the payment is made refers to the period of employment with Employer B.

Therefore, the Taxpayer’s redundancy payment is calculated with reference to their period of employment with the Employer B only. Accordingly, the tax-free part of the genuine redundancy payment that the Taxpayer received from the Employer is calculated accordingly.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).