Edited version of your written advice

Authorisation Number: 1013003086121

Date of advice: 26 April 2016

Ruling

Subject: Genuine redundancy

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 overseas employment?

Answer

No.

This ruling applies for the following period:

Income year ending 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You commenced employment with the Employer in the 200X-0X income year.

In later years you transferred to an associate entity of the Employer in an overseas country.

Several years later you transferred back to the Employer.

In the relevant income year your employment with the Employer was terminated due to redundancy.

You have provided your final pay slip from the Employer which shows amongst other items that you received:

Redundancy (Term D) $XX

Excluded LB ETP $ X

The Employer used a service period of Y years, those for service in Australia, in calculating the tax-free portion of the genuine redundancy payment.

You stated that:

• the Employer had introduced a policy to only count Australian service when calculating service period for the payout of redundancy; and

• the Employer has applied this policy to all staff who had overseas placements.

Relevant legislative provisions

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

Based on the information provided, the calculation of the 'years of service' in relation to the tax-free amount of your genuine redundancy payment does not include your overseas period of service as the Employer has acknowledged the payment as only relating your total years of service in Australia.

Detailed reasoning

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

The character of the payment you received 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.

Tax-free amount 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.

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 2015-16 income year is $9,780 and the service amount is $4,891. Any amount that the taxpayer receives which falls below this limit will attract no tax, that is, such an amount will be tax-free. In relation any amount of a GRP which exceeds the tax-free amount, it is taxed as an employment termination payment.

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.

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.

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.

The facts provided show that the Employer has not taken your employment in the overseas country into consideration when calculating the tax-free amount.

Despite paragraph 69 in TR 2009/2, which 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 your case the facts show that, though you had a total of X years' service in Australia and the overseas country with the Employer and its associated entity, the Employer has decided to apply a policy to recognise the payment as relating only to your Australian service; which, in your case is Y years of service.

Accordingly, the facts you have provided do not support your contention that your employment with the Employer for the purposes of calculating the tax free threshold should use a service period of X years.