Edited version of private ruling

Authorisation Number: 1011672022188

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Subject

Genuine redundancy payment - Years of service

Ruling

Question

Do the completed years of service with the related employer get taken into account in determining the tax free amount of a genuine redundancy payment?

Answer: Yes.

This ruling applies for the following period

For the year ended 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts

A number of years ago, your client commenced employment with a company (Company 1).

In 1995, Company 1 entered into a joint venture arrangement with a company (Company 2) forming a new company, Company 3.

Part of the business of Company 1, including some employees, were transferred to Company 3.

In 2000, Company 3 became a wholly owned subsidiary of Company 2.

In late 2005, Company 3 changed its name to another company (Company 4).

Your client was one of the employees transferred from Company 1 to Company 3 as part of the joint venture arrangement.

Your client was initially employed by Company 1. During your client's employment with Company 1, Company 3 and Company 4 your client was promoted into a supervisory position and later to other management roles.

The Global Financial Crisis of 2008/2009 had a severe impact on sales and as a result Company 4 was forced to cut back production and dismiss employees.

In early 2009, a voluntary separation plan (VSP) was offered by Company 4 to eligible management employees.

Your client was one of the management employees who accepted the VSP offer made by Company 4.

Company 4 confirmed your client's election to accept the VSP and requested written acceptance of the VSP from your client. The letter included a termination pay summary which showed the date your client commenced employment and a termination date and included a specified number of years service.

In early 2009, your client ceased employment.

The termination pay summary shows payments to be made to your client on termination of employment which included severance pay, payment in lieu of notice, STIP at target, and an annual leave entitlement.

The severance payment was calculated as one month per year of service up to a maximum 12 months.

In early 2009, an employment termination payment less an amount of tax withheld was made to your client.

The tax free component of the severance payment was calculated for some of the completed years of service.

Your client is over the age of 55 years.

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

A portion of the severance payment represents the tax free part of a genuine redundancy payment. The remaining balance is the taxable component of an employment termination payment.

The taxable component should be included in your client's assessable income for the 2008-09 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:

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.

In this case, your client commenced employment some years ago and was made redundant in early 2009.

Your client accepted a voluntary redundancy payment on termination of employment which included a severance payment. The severance payment relates to your client's period of employment which included a period of prior service.

The severance payment is calculated as being 1 month per year of service and capped at a maximum of 12 months pay.

The termination pay summary from the employer shows your client was employed for a specified number of years of service and showed an annual pay rate.

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 your client commenced employment with Company 1 until your client was made redundant in early 2009).

For the 2008-09 income year, the base amount is $7,350 and the service amount is $3,676. Therefore the tax free amount calculated in accordance with subsection 83-175(3) of the ITAA 1997, is the tax-free part of the genuine redundancy payment your client can receive in the 2008-09 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.

After deducting the tax free amount of the severance payment the remaining amount is an employment termination payment.

Tax Treatment of the employment termination payment

An employment termination payment made on or after 1 July 2007 will be comprised of the following components:

· Tax free component this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and

· Taxable component the amount remaining after deducting the tax free component from the total payment.

In your client's case, there is no invalidity segment. Therefore after deducting the tax-free amount the remaining amount is a taxable component of an employment termination payment.

The taxable component is subject to tax, depending on the person's age, as follows:

* Preservation age is the age at which retirees can access their superannuation benefits. This will be 55 for persons born before 1 July 1960 and between 55 and 60 for persons born after 30 June 1960.

The $140,000 cap on concessionally taxed employment termination payments is indexed annually to average weekly ordinary time earnings. For the 2008-09 income year, the cap is $145,000.

The taxable components of all life benefit employment termination payments received in an income year are counted towards this cap. Any tax-free amounts are not counted towards the cap.

In this case, your client has reached preservation age on the last day of the income year in which the payment was made. The taxable component of the employment termination payment is to be included in your client's assessable income for the 2008-09 income year.

As the payment is under the ETP cap of $145,000, your client is entitled to a tax offset that ensures that the rate of income tax on the taxable component does not exceed 15% in accordance with subsection 82-10(3) of the ITAA 1997. In addition, the Medicare levy may apply.