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Ruling

Subject: genuine redundancy payment - years of service

Question

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

Answer: Yes

This ruling applies for the following period

Year ending 30 June 2011

The scheme commences on

1 July 2010

Relevant facts and circumstances

Many years ago an Employee (the Employee) commenced employment with an employer company (the Company).

Over subsequent years the Company was acquired by another entity which in turn was acquired by another entity. During these acquisitions the Employee's services were maintained by the successor entities.

In the 20xx income year one of the successor entities divested part of its business to form a new entity and the Employee's services and remaining entitlements were subsequently transferred to the employment with the new entity.

The Employee, years later, transferred to another related entity which was based in Australia (the Employer).

During the acquisitions, divestitures and restructures, the Employee has always:

· worked on the same product;

· retained the same job title; and

· reported to the same manager.

In the 2010-11 income year the Employee was made genuinely redundant and paid a lump sum redundancy payment (the payment).

The Employer states that the payment, which is in addition to the Employee's other entitlements, is in recognition of the Employee's full service with it and all of the related entities.

The Employee did not receive any termination payments as result of the acquisitions, divestitures and restructures.

The Employee's is less than 50 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 total years of service, with the final employer and related employers, these years of service can be included in working out the tax free amount of the genuine redundancy payment.

This means part of the genuine redundancy payment is the tax free part of the and the balance of the payment is a taxable component which should be included in the Employee's assessable income for the 2010-11 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, the Employee commenced employment with a company (the Company) many years ago. Subsequent to that employment there were, over the years, acquisitions, divestitures and restructures which ultimately resulted in the Employee's final employer being the Employer.

Throughout the Employee's total years of employment, that is, with the Company up to the date of termination of employment with the Employer (due to a genuine redundancy), the Employee always:

· worked on the same product;

· retained the same job title; and

· reported to the same manager.

As a result of the genuine redundancy, the Employer decided to pay the Employee a redundancy payment (the payment).

This payment, which is in addition to the Employee's other entitlements, was started by the Employer as being in recognition of the Employee's total years of employment.

Consequently the years of service to which the genuine redundancy payment relates the total years of employment.

For the 2010-11 income year, the base amount is $x and the service amount is $y. Therefore in accordance with subsection 83-175(3) of the ITAA 1997, the tax free part of a genuine redundancy payment the Employee can receive in the 2010-11 income year equals:

$x + ($y × the whole years of service (relating to the Employee's total years of employment)) 

Therefore, the amount calculated above is the tax free amount of the severance payment which 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 (that is the lump sum payment less the tax free 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 the Employee's case, there is no invalidity segment. Therefore the amount in excess of the tax free amount is a taxable component.

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 2010-11 income year, the cap is $160,000.

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, the Employee has not reached preservation age on the last day of the income year in which the payment was made. The amount of the payment in excess of the tax free amount is therefore a taxable component of an employment termination payment and to be included in the Employee's assessable income for the 2010-11 income year.

Further, in accordance with subsection 82-10(3) of the ITAA 1997 the employment termination payment attracts a tax offset which ensures that the rate of income tax on that payment does not exceed 30%. In addition, the Medicare levy may apply.