Edited version of your private ruling

Authorisation Number: 1012499540960

Ruling

Subject: Genuine redundancy - Years of service

Question

Do the 'years of service' for the purposes of the calculation of the tax-free part of a genuine redundancy payment include overseas service?

Advice/Answer

Yes.

This review applies for the following period

Year ended 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

You are under the age of 55 years.

A number of years ago, you were employed by an employer (your employer).

Your employer operates a number of corporate entities within Australia and overseas.

During the 2008-09 income year, you were issued a letter from your employer that from a specified date, all Australian employees will be employed under a single entity, known as Company A.

You have completed a specified number of years of service with your employer and were employed in overseas branches of your employer for a number of years. During the 2008-09 income year, you were transferred to the Australian operations.

In the 2012-13 income year, your employment with your employer terminated.

In the 2012-13 income year, you received a redundancy payment from your employer. The payment included pay in lieu of notice, additional notice and severance pay with an amount of tax withheld.

The tax-free limits to the payment were applied to a specified number of completed years relating to your Australian employment.

A copy of your contract of employment with your employer was provided.

A letter from the former employer advises the severance payment was calculated with reference to your total period of service with the employer that is, a specified number of whole years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-170

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 (GRP) 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 satisfied all criteria set out in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997).

Section 83-170 of the ITAA 1997 applies to determine the tax-free treatment of a GRP and places a limit on the amount of a GRP that is eligible for concessional tax treatment.

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. 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)

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 2012-13 income year is $8,806 and the service amount is $4,404. 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 have been employed at your employer for a specified number of years and your employment was terminated during the 2012-13 income year. It is also noted in the facts that you have completed a specified number of years of overseas employment, with the remaining period of service completed in Australia.

On termination of your employment, you received a redundancy payment which included pay in lieu of notice, additional notice and severance pay.

Your employer advised that as part of rationalisation of their existing corporate entities, and a recent decision to implement the consolidation of the various businesses, the company made the decision that all Australian employees will be employed under the single entity known as Company A. As part of the matters agreed between the company and the various Australian subsidiaries, your continuous service with your current employer and any prior related entity will be regarded as continuous with Company A for all service related entitlements. Accordingly, all of your accrued service related entitlements will be transferred in full to Company A.

In accordance with the above, your overseas period of service would normally be included in the calculation of 'years of service' in relation to your GRP.

This was confirmed in a letter dated mid 2013 from your employer which advised that the employer recognised your prior overseas service with the company and would pay you as per their policy, for a specified number of continuous years and being over a specified age and eligible for a specified number of weeks pay which also included an overseas employment period.

From the facts of this case, it is evident that the termination payment relates to the period of your employment with your employer. As your employer did include your overseas employment period in relation to your redundancy payment, the period attributable to your overseas employment will be taken into account. Therefore, the relevant 'years of service' for the GRP is for a specified number of whole years of service.

As your dismissal occurred during the 2012-13 income year, the base amount will be $8,806 and the service amount will be $4,404. Therefore the amount calculated under the formula in accordance with subsection 83-170(3) of the ITAA 1997, is the tax-free part of the genuine redundancy payment.

After deducting the tax-free amount of the GRP the remaining amount is a taxable component of an employment termination payment.