Edited version of your written advice

Authorisation Number: 1012726350589

Ruling

Subject: Genuine redundancy payment.

Question

For the purposes of calculating the tax-free amount of a genuine redundancy payment under subsection 83-170(3) of the Income Tax Assessment Act 1997 does 'years of service' include your employment prior to the 1989-90 income year?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

You commenced employment with the Employer during the 19XX income year and worked until the 19YY income year when you left the Employer.

You recommenced employment with the Employer during the 19ZZ income year.

In the relevant income year your employment will be terminated in accordance with a Severance Scheme (the Scheme) implemented by the Employer.

Documents showing the Employer's estimate of your severance payment, had your last day of service been on a particular date in the relevant income year, has been provided. This documentation shows, amongst other items:

• you would receive X and Y as a severance payment and weeks in lieu payment respectively;

• the tax withheld on the payments; and

• the employment commencement date used by the Employer was during the 19ZZ income year.

In correspondence you provided, which refers to discussions held by you with the Employer, it shows:

(a) in calculating the tax free amount of the severance payment the Employer did not take into consideration your first period of employment as it was considered a break in service; and

(b) after you received the estimates, and you brought the first service period to the Employer's attention, the Employer maintained the first service period was not included by referring to:

• the Employer's guidelines for calculating the severance (3 weeks for every continuous service to a maximum of 52 weeks); and

• regulations which defined 'service'.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 27A(19).

Income Tax Assessment Act 1997 section 82-130.

Income Tax Assessment Act 1997 section 82-135.

Income Tax Assessment Act 1997 paragraph 82-135(c).

Income Tax Assessment Act 1997 paragraph 82-135(d).

Income Tax Assessment Act 1997 paragraph 82-135(e).

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.

Income Tax Assessment Act 1997 subsection 83-175(1).

Income Tax Assessment Act 1997 subsection 83-175(2).

Income Tax Assessment Act 1997 subsection 83-175(3).

Income Tax Assessment Act 1997 subsection 83-175(4).

Reasons for decision

Summary

As the payment you will receive from the Employer under the Scheme only relates to your service with the Employer from the 19ZZ income year (the second period), only the years of service in the second period can be used in calculating the tax-free amount of the genuine redundancy payment under subsection 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

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

In your case, the facts provided show that the severance payment that will be made to you is 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) of the ITAA 1997 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)

For the relevant income year:

Base amount means $9,514;

Service amount means $4,758; and

Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates.

The explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Act 2007 states at paragraph 4.61:

The tax free part of a payment is determined by reference to a base amount plus an amount per year of service. This replicates the existing concession offered to such payments.

The existing concession referred to subsection 27A(19) of the Income Tax Assessment Act 1936 (ITAA 1936).

In discussing the meaning of the term years of service, the Explanatory Memorandum to the Taxation Laws Amendment (Superannuation) Act 1992 which inserted subsection 27A(19) into the ITAA 1936, states: 

The relevant period of completed service is the same as the period defined in paragraph (a) of the definition of eligible service period in subsection 27A(1). That is, the period, or aggregate of the periods, of the employment to which the payment relates. However, eligible service period is expressed in days, while the service period for subsection 27A (19) purposes is expressed in whole years.(emphasis added)

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.

Paragraphs 69 and 70 of TR 2009/2 state:

69. The extent to which the payment is tax-free will ordinarily 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.

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 that 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 periods of employment with the employer or a related employer can be taken into consideration in calculating the years of service provided the employment termination payment is made in recognition of that earlier employment and/or related employment.

As previously stated, only if the employment termination payment is made in recognition of earlier employment with the employer or a related employer will the periods of such earlier employment be taken into consideration.

Your employment commenced during the 19ZZ income year and will cease before the end of the relevant income year. Hence the 'years of service' to which the genuine redundancy payment relates is the whole years of service in your second period of employment (B years).

You were previously employed by the same Employer for approximately A years from the 19XX income year until the 19YY income year. There was a break in your employment of before you resumed your employment with the Employer.

The facts provided show that the Employer has not taken your first A years of employment into consideration when calculating the tax free amount.

Despite paragraph 69 in TR 2009/2 shows there is no requirement for years of service to be continuous when applying the threshold in section 83-170 of the ITAA 1997, paragraph 70 states that for the prior years of employment to be used in the calculation, the employer must acknowledge those prior years as relating to the payment. In this case, the facts show that the Employer, though aware that you had X years prior service, has decided to recognise the payment as relating to YY years of service.

Accordingly, the tax-free part of a GRP you can receive in the relevant income year under subsection 83-175(3) of the ITAA 1997 is:

$9,514 + ($4,758 × B years)

Therefore, part of the GRP you receive will be non-assessable and non-exempt income. In relation to the amount of the GRP in excess of that tax-free part it will be taxed as an employment termination payment.