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Edited version of your private ruling
Authorisation Number: 1012526168647
Ruling
Subject: Genuine redundancy payment
Questions:
Do the 'years of service' for the purposes of the calculation of the tax-free part of a genuine redundancy payment include all the years of service with a previous employer?
Advice/Answers:
No.
This ruling applies for the following period:
1 July 2012 to 30 June 2013
The scheme commenced on:
1 July 2012
Relevant facts:
Your client is under 55 years of age.
Your client worked for an employer (Employer 1) for some years.
Your client then commenced employment with a related employer (Employer 2) for a few more years.
Your client's employment with Employer 2 terminated due to genuine redundancy and your client was entitled to a redundancy payment.
An estimate of payments shows your client's redundancy payment was based on a number of years of service which were less than the sum of the employment years with Employer 1 and Employer 2.
Relevant legislative provisions:
Income Tax Assessment Act 1936 Subsection 27A(1).
Income Tax Assessment Act 1936 Subsection 27F(1).
Income Tax Assessment Act 1997 Section 82-130.
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.
Income Tax Assessment Act 1936 Subsection 27A(19).
Reasons for decision
Summary
The 'years of service' for the purposes of the calculation of the tax-free part of the genuine redundancy payment are less than the sum of the employment years with Employer 1 and Employer 2. This is because the actual payment is based on that lesser number of years.
Detailed reasoning
Section 83-170 of the ITAA 1997 applies to determine the tax-free treatment of a GRP. Section 83-170 of the ITAA 1997 places a limit on the amount of a GRP that is eligible for concessional tax treatment and states:
83-170(1) This section applies if you receive a genuine redundancy payment or an early retirement scheme payment.
83-170(2) So much of the relevant payment as does not exceed the amount worked out under subsection (3) is not assessable income and is not exempt income.
83-170(3) Work out the amount using the formula:
Base amount + (Service amount Years of service)
where:
base amount means:
(a) for the income year 2006-2007 - $6,783; and
(b) or a later income year - the amount mentioned in paragraph (a) indexed annually.
service amount means:
(a) for the income year 2006-2007 - $3,392; and
(b) for a later income year - the amount mentioned in paragraph (a) indexed annually.
years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates.
In this case, it is clear your client has complete years of service equal to the sum of employment years with Employer 1 and Employer 2. However, the facts show (for whatever reason) your client has received a payment based on a number of years of service which are less than the sum of the employment years with Employer 1 and Employer 2.
The Commissioner has no discretion to allow a period of service other than that recognised by the employer and on which the payment has been based. Consequently, the service period for the GRP is less than the sum of the employment years with Employer 1 and Employer 2.
Tax-free treatment of this genuine redundancy payment
Your client's employer has recognised a certain number of years of service and based the payment on this number of years.
Therefore in accordance with subsection 83-175(3) of the ITAA 1997, the tax-free part of a genuine redundancy payment your client can receive in the 2012-13 income year equals:
$8,806 + ($4,404 x years of service recognised by Employer 2).
However, your client received a redundancy payment which is above the threshold calculated above. This tax-free amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997. It does not have to be declared in your client's income tax return.
The amount which is above the tax free amount is taxed as an employment termination payment.
Tax Treatment of the employment termination payment
An employment termination payment is comprised of the following components:
Ÿ Tax free component - this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and
Ÿ Taxable component - the amount remaining after deducting the tax free component from the total payment.
The tax free component is not assessable income and is not exempt income.
The taxable component is included, in full, as assessable income and is subject to tax depending on the person's age when the payment is received. As your client is under preservation age, the taxable component is taxed at 30% for amounts below the employment termination payments cap of $175,000 for the 2012-13 income year.