Edited version of private advice

Authorisation Number: 1051659790916

Date of advice: 13 August 2020

Ruling

Subject: Genuine redundancy payments

Question 1

Is the payment the taxpayer received a 'genuine redundancy payment' under section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

In accordance with section 83-170 of the ITAA 1997, is any amount of the payment the Taxpayer received tax free?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2020

The scheme commences on:

1 July 2019

Relevant facts and circumstances

The taxpayer was employed by the Employer since 2003.

During that time, the taxpayer took maternity leave on two occasions:

a.    In 2009, being three months of paid maternity leave and nine months unpaid leave.

b.    In 2011, being three months of paid maternity leave and nine months unpaid leave.

In 2019, the Taxpayer terminated employment with the Employer.

The Taxpayer was paid a Redundancy Payment (the Payment) in 2019. The documentation records an ETP Service Start date of 2006 (the Start Date).

Information reported to us by the Employer is that the Payment the Taxpayer received contained lump sum A and lump sum D amounts. The lump sum A amount is taxable as it represents unused annual and long service leave. The lump sum D amount is tax-free as it represents the tax free component of a genuine redundancy payment.

The Taxpayer advised that the ETP Service Start date was changed in order to exclude the 18 months of unpaid maternity leave taken from their service period. The Taxpayer advised us that such a change was permitted under Victorian state legislation prior to 2018. The Employer also mentioned to us that they recognised 15 years of service in respect of the Payment.

Relevant legislative provisions

Taxation Laws Amendment (Superannuation) Act 1992 Explanatory Memorandum

Income Tax Assessment Act 1997 subsection 82-130(4).

Income Tax Assessment Act 1997 section 82-135.

Income Tax Assessment Act 1997 paragraph 82-135(e).

Income Tax Assessment Act 1997 section 83-170.

Income Tax Assessment Act 1997 section 83-175.

Reasons for decision

Genuine redundancy

A payment made to an employee is a genuine redundancy payment if it satisfies all the conditions set out in section 83 175 of the ITAA 1997.

Subsection 83-175(4) of the ITAA 1997 states that a payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 of the ITAA 1997 (apart from paragraph 82-135(e)).

In the taxpayer's situation, the lump sum A amount is not a genuine redundancy payment. This is because it relates to a payment mentioned under section 82-135 of the ITAA 1997.

The lump sum D amount relates to a payment which is mentioned in paragraph 82-135(e). As a result, it is a 'genuine redundancy payment' provided that it satisfies all the other conditions set out in section 83 175 of the ITAA 1997.

Tax free amount

Subsection 83 170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment 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. Any amount in excess of the tax free amount is taxed as an employment termination payment. The formula for working out the tax free amount is:

Base amount + (Service amount × Years of service)

For the 2019 20 income year:

Base amount means $10,638;

Service amount means $5,320; 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 calculation of years of service is based on years of continuous service, and does not include any periods of unpaid leave.

The taxpayer's employment commenced in 2003 and ceased in 2019.

During that period, the Taxpayer took maternity leave for a cumulative period of 6 months paid and 18 months unpaid. This period refers to the maternity leave (3 months paid and 9 months unpaid) you took in 2009 and in 2011.

The Commissioner issued Taxation Ruling TR 2009/2, titled Income tax: genuine redundancy payments, which provides useful guidance on the interpretation of section 83-175 of the ITAA 1997 and the tax free amount under section 83-170.

Paragraph 69 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.

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.

The genuine redundancy payment the Taxpayer received from the Employer relates to 15 whole years of employment, including the period taken of unpaid maternity leave.  

Accordingly, the tax-free part of the genuine redundancy payment for the 2019-20 income year under subsection 83-170(3) of the ITAA 1997 is:

As the Taxpayer's genuine redundancy payment is below the tax-free threshold, the entire amount is tax-free as a genuine redundancy payment. Therefore, this amount is deemed to be non-assessable, non-exempt income.

Consequently the taxpayer does not need to include the entire amount of their genuine redundancy payment in their tax return for the 2019-20 income year.

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