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Edited version of your written advice
Authorisation Number: 1051437640288
Ruling
Subject: Genuine redundancy – years of service
Question
For the purposes of section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997), do the years of service include the years of service with Employer A?
Answer
No.
This ruling applies for the following period:
Income year ended 30 June 2018
The scheme commences on:
1 July 2017
Relevant facts and circumstances
You commenced employment with Employer A in the 2014-15 income year.
In the 2015-16 income year you ceased employment with Employer A and commenced employment with Employer B.
In the 2017-18 income year your employment with Employer B was terminated by reason of redundancy and you entered into a Deed of Agreement (the Deed) with Employer B.
A schedule to the Deed provides for an Estimate (the Estimate) of the amounts you would receive and how they would be taxed.
The Estimate also showed:
(a) Employer B only recognised your period of service with Employer B when calculating your genuine redundancy payment;
(b) Employer B recognised the whole years of continuous service with Employer B when calculating the tax-free part of your genuine redundancy payment; and
(c) when calculating your long service leave payment, Employer B recognised your years of service with Employer A; and
(d) a calculation (the Calculation) with reference to the National Employment Standards where your entitlements for years of service with Employer B were recognised.
You advised that your redundancy payment from Employer B was in accordance with your Enterprise Agreement (the EA).
The EA contains:
● a clause that employees are eligible for long service leave in accordance with the Long Service Leave (Commonwealth Employees) Act 1976 (the LSL Act); and
● clauses for severance pay purposes and how payments for those purposes are calculated. One of the clauses involves a calculation with reference to entitlements under the National Employment Standards.
Employer B calculated your redundancy payment in accordance with the relevant clauses of the EA and that amount was reflected in the PAYG payment summary - employment termination payment you received for the 2017-18 income year in respect of that payment.
The LSL Act contains provisions that Employer B can recognise your prior service with Employer A for long service leave purposes.
Employer B calculated your long service leave payment in accordance with the relevant provisions of the LSL Act and that amount was reflected in the PAYG payment summary – individual non-business you received for the 2017-18 income year in respect of that payment.
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 Subsection 83-175(4)
Long Service Leave (Commonwealth Employees) Act 1976 Subsection 10(1)
Long Service Leave (Commonwealth Employees) Act 1976 Subsection 11(1)
Long Service Leave (Commonwealth Employees) Act 1976 Subsection 11(2)
Reasons for decision
Summary
As the payment you have received from Employer B only relates to your time with Employer B, for the purposes of subsection 83-170(3) of the ITAA 1997 only the years of service with Employer B can be used in calculating the tax-free amount of the genuine redundancy payment.
Detailed reasoning
Tax-free treatment of a genuine redundancy payment
Section 83-170 of the ITAA 1997 applies to determine the tax free treatment of a genuine redundancy payment.
Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment 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 employment termination payment.
As per subsection 83-170(3) of the ITAA 1997, the formula for working out the tax-free amount is:
Base amount + (Service amount × Years of service)
years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates.
Years of service
Taxation Ruling TR 2009/2: Income tax: genuine redundancy payments provides guidance on the factors to be considered in ascertaining the years of service under section 83-170.
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 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 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.
As previously stated, only if the termination payment is made in recognition of earlier employment with a related employer will the periods of such earlier employment be taken into consideration.
In this case, you ceased employment with Employer A in the 2015-16 income year. You then commenced employment with Employer B, an unrelated employer, in the same income year.
In the 2017-18 income year your position with Employer B was made genuinely redundant. The termination payment you received from Employer B was calculated, in accordance with the EA, with reference to your employment with Employer B. Employer B did not recognise any service with Employer A.
The termination payment being made only in recognition of your service with Employer B is also reflected in the Calculation in the schedule to the Deed. The Calculation used National Employment Standards for redundancy based on your entitlements for years of service with Employer B.
If Employer B had intended the termination payment to include your Employer A service, the Calculation would have used a redundancy entitlement under the National Employment Standards which would have included your service with Employer A.
As the payment you received from the Employer B only relates to your time with Employer B, for the purposes of subsection 83-170(3) of the ITAA 1997, only the years of service with Employer B can be used in calculating the tax-free amount of your genuine redundancy payment.
Consequently, the years of service to which your genuine redundancy payment relates is the whole years of service with Employer B.
In calculating your long service leave payment ((a payment excluded under subsection 83-175(4) of the ITAA 1997 from being part of a genuine redundancy payment) it is noted Employer B did recognise your prior service with Employer A. The recognition of the service with Employer A was taken into account in accordance with the LSL Act for the purposes of calculating your long service leave payment.
Therefore, in accordance with subsection 83-170 (3) of the ITAA 1997, the tax free part of your genuine redundancy payment is calculated as follows:
$10,155 + ($5,078 × whole years of service with Employer B) = $Y
The amount of $Y is the tax free amount which is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997.
The remaining amount of the redundancy payment in excess of $Y is an employment termination payment and treated as assessable income in the 2017-18 income year.