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Edited version of your written advice
Authorisation Number: 1012927496531
Date of advice: 15 December 2015
Ruling
Subject: Genuine redundancy
Question
Did the Taxpayer's years of service need to be continuous when applying the threshold in accordance with section 83-170 of the Income Tax Assessment Act 1997?
Answer
No
This ruling applies for the following period
Income year ended 30 June 2016
The scheme commenced on
1 July 2015
Relevant facts and circumstances
1. The Taxpayer was employed by the Employer for a period of time as an Employee and Contractor.
2. The Taxpayer provided her executed Deed of Separation (the Deed).
3. The Taxpayer was made redundant on the Effective date.
4. The Deed accepts that the Taxpayer was employed for a certain number of years as an Employee and Contractor.
5. The Taxpayer's entitlements included a redundancy payout by the Employer.
6. The Taxpayer stated that the Employer incorrectly used the period of years of service in calculating the tax free portion of the genuine redundancy payment.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 83-170
Reasons for decision
Summary
7. The Taxpayer's period of service should include the Taxpayer's period of employment (not including the contracting period).
Tax-free amount of a genuine redundancy payment
8. Tax-free treatment of genuine redundancy payments and early retirement scheme payments
9. Section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997) applies
a) if you receive a * genuine redundancy payment or an * early retirement scheme payment.
b) 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.
c) Work out the amount using the formula:
Base amount + (Service amount x Years of service)
10. Some or all of a genuine redundancy payment may be non-assessable non-exempt income, and accordingly tax-free, under section 83-170 of the ITAA 1997.
11. 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 of the ITAA 1997.
12. Taxation Ruling TR 2009/12 at paragraph 70 states that:
"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".
13. TR 2009/12 at paragraph 46 states that:
"the years of service provided by the dismissed employee and the value of their remuneration package at the time of the dismissal are the most influential factors in determining what could reasonably be expected under an arm's length dealing".
14. In view of the facts provided the Employer has recognised in the Deed the previous employment service. Therefore, the period of service in calculating the years of service should include the whole employment period, but not the period of contracted employment.
15. In addition, it would appear that the Employer paying an amount as a redundancy payout, and it would follow that would be calculated on a period of service longer than that originally recognised the Employer.