Edited version of your written advice

Authorisation Number: 1012702338727

Ruling

Subject: Genuine redundancy payment

Question 1

Is your client's period of service in an overseas related company recognised in determining the tax-free component of your client's genuine redundancy payment under section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is your client's period of service in an overseas related company recognised in determining the tax-free component of your client's employment termination payment under section 82-140 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

Your client was employed by a company in an overseas country (the Overseas Company) and worked overseas for several years.

Your client was transferred from the overseas company to a sister company in Australia (the Australian Company) and began working in Australia.

In the relevant income year, your client's employment with the Australian Company was terminated.

In the relevant income year, your client received a termination payment (the Payment) from the Australian Company in consequence of the termination of your client's employment.

Copies of your client's 'PAYG payment summary - individual non-business' and 'PAYG payment summary - employment termination payment' show that the Payment arose from a genuine redundancy.

The tax-free limits to the Payment were applied only to the completed years of your client's Australian employment.

You state:

• your client's sick leave was calculated by the Australian Company on the basis of your client's employment commencement date with the Overseas Company

• the Australian Company held a celebration in recognition of your client's years of service, of which only a number of those years of service were performed with the Australian Company.

A letter from the Australian Company made it clear that the years of service that were taken into consideration when making the Payment included your client's entire unbroken service with both the Overseas Company and the Australian Company (the Company Group).

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 82-10(1)

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 section 82-140

Income Tax Assessment Act 1997 subsection 82-155(2)

Income Tax Assessment Act 1997 section 83-170

Income Tax Assessment Act 1997 subsection 83-170(2)

Income Tax Assessment Act 1997 subsection 83-170(3)

Income Tax Assessment Act 1997 section 83-175

Reasons for decision

Summary

The calculation of the 'years of service' in relation to your client's genuine redundancy payment (GRP) will include your client's overseas period of service because the Payment is made in respect of your client's total years of service with the Company Group.

Your client's overseas period of service is recognised in determining the tax-free component of your client's employment termination payment (ETP) because the Payment relates to your client's total years of service with the Company Group, which includes a period of employment which occurred before 1 July 1983.

Detailed reasoning

Tax-free treatment of a genuine redundancy payment

A payment made to an employee is a GRP if it satisfies all of the criteria set out in section 83-175 of the ITAA 1997.

The character of the Payment as a GRP is not in question in this case.

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.

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 ETP. The formula for working out the tax free amount is:

Base amount + (Service amount x 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 2013-14 income year is $9,246 and the service amount is $4,624. 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 a 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 termination payment. Non-continuous periods of employment with the employer or a related employer can be taken into consideration in calculating the 'years of service' provided the termination payment is made in recognition of that earlier employment and/or related employment.

In this case, your client was employed by the Australian Company, the employer making the termination payment, for a period of time. Prior to that, your client was employed overseas by a related employer, the Overseas Company, for a period of time.

You stated that the Australian Company had recognised your client's earlier years of service with the Overseas Company in that:

• your client's sick leave was calculated by the Australian Company on the basis of your client's employment commencement date with the Overseas Company.

• the Australian Company held a celebration in recognition of your client's years of service, of which only a number of those years of service were performed with the Australian Company.

The recognition of your client's service in the Overseas Company was further confirmed in a letter from the Australian Company which made it clear that the years of service that were taken into consideration when making the Payment included your client's entire unbroken service with the Company Group.

As the Australian Company did include your client's employment with the Overseas Company in relation to the Payment, the period attributable to your client's overseas employment will be included in the calculation of the 'years of service'.

In accordance with subsection 83-170(3) of the ITAA 1997, the tax-free portion of the GRP that your client received in the 2013-14 income year equals:

$9,246 + ($4,624 x whole years of service) 

Consequently, a portion of the GRP is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997.

Tax-free treatment of an employee termination payment

The remaining part of your client's Payment is an ETP.

According to section 82-140 of the ITAA 1997:

The tax free component of an employment termination payment is so much of the payment as consists of the following:

(a) the invalidity segment of the payment;

(b) the pre-July 83 segment of the payment.

In your client's case, there is no invalidity segment of the payment since ill-health was not the reason why your client ceased to be gainfully employed. However, there is a pre-July 83 segment of the Payment since the Payment relates to your client's total years of service with the Company Group, some of which occurred before 1 July 1983.

The calculation of the pre-July 83 segment of an ETP is covered by subsection 82-155(2) of the ITAA 1997. To calculate the pre-July 83 segment, first subtract the invalidity segment (if any) from the ETP, and then multiply the amount by the following fraction:

Number of Days of employment to which the payment relates that

occurred before 1 July 1983

Total Number of days of employment to which the payment relates

Consequently, a portion of the remaining part of your client's Payment is the tax-free component of the ETP, which is not assessable income and is not exempt income under subsection 82-10(1) of the ITAA 1997.

The remaining part of the ETP represents the taxable component of the ETP.

Refund of tax withheld

1. If your client's employer has withheld the incorrect amount of tax from the termination entitlements, it can be rectified when your client's tax return for the relevant income year is lodged. As your client does not include the non-assessable non-exempt income amounts of Payment in the tax return, any excess of tax withheld for the income year will be credited to your client once the tax return is processed.