Edited version of your written advice

Authorisation Number: 1051461082007

Date of advice: 05 December 2018

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 (ITAA 1997) does ‘years of service’ include a person’s (the Taxpayer’s) employment with their previous employers?

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

The Taxpayer commenced employment with an entity (the Employer) in the 2016-17 income year.

Prior to starting employment with the Employer, the Taxpayer was employed by a related entity (Entity 1) for a period and by another related entity (Entity 2) for another period.

On commencement with the Employer, the Taxpayer’s prior service with Entity 1 and Entity 2 was recognised for the purposes of long service leave and sick leave.

The terms of the Taxpayer’s employment with the Employer were set out in an employment agreement (the Agreement). The Agreement was for a term of five years and was to expire on a specified date.

In accordance with the Agreement, the Employer could terminate Taxpayer’s employment on the ground of redundancy during the term only where:

(a) the Taxpayer’s position genuinely no longer exists or will no longer exist; and

(b) the Employer has declared or intends to declare the Officer’s position redundant

With regard to Taxpayer’s entitlements on redundancy, the Agreement provides that:

If a redundancy occurs during the specified term, then the Taxpayer’s entitlements will be one quarter (1/4) of the balance of the contract (that is, the period between redundancy date and the end of the contract term) with payment based on the Taxpayer’s Total Remuneration amount.

One year after the commencement date, the Employer notified the Taxpayer that their position had been made redundant.

Following the termination, the Taxpayer received a lump sum termination payment which was equal to the amount of the Taxpayer’s annual Total Remuneration amount.

When calculating the tax-free component of the redundancy payment, the Employer calculated the Taxpayer’s length of service as one year.

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

As specified in the Agreement, the payment that the Taxpayer has received from the Employer was calculated with reference to the period between their redundancy date and the end of their contract term.

Therefore, for the purposes of subsection 83-170(3) of the ITAA 1997, ‘years of service’ in this case do not include the Taxpayer’s employment periods with Entity 1 and Entity 2.

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.

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 assessable income and is taxed as an employment termination payment.

In accordance with subsection 83-170(3) of the ITAA 1997, the formula for working out the tax-free amount is:

Base amount + (Service amount x Years of service)

For the 2017-18 income year:

Base amount means $10,155

Service amount means $5,078

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

Calculation of ‘years of service’

The Commissioner has issued Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments, which provides useful guidance on the interpretation of section 83-175 of the ITAA 1997 and the tax-free amount under section 83-170 of the ITAA 1997.

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 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 employment termination payment is made in recognition of that earlier employment and/or related employment.

In this instance, the Employer recognised the Taxpayer’s earlier years of service for the purposes of calculating their long service leave and their sick leave at the commencement of their employment. However, in accordance with the Agreement, the redundancy payment was calculated with reference to the period between redundancy date and the end of contract term rather than the completed years of service. In this case, that is only one year.

Accordingly, the tax-free part of a GRP the Taxpayer received in the 2017-18 income year calculated under subsection 83-175(3) of the ITAA 1997 is:

$10,155 + ($5,078 x 1) = $15,233

Therefore, $15,233 of the GRP the Taxpayer received is not assessable income and is not exempt income. The amount of the GRP in excess of the $15,233 tax-free amount is assessable income and is taxed as an employment termination payment.