Edited version of private advice

Authorisation Number: 1051754714443

Date of advice: 30 October 2020

Ruling

Subject: Calculation of the tax-free component of a genuine redundancy payment

Question

Can your prior years of service with Employer A be used in the calculation contained within section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997) to determine the tax-free component of the genuine redundancy payment you received from Employer B for the 20XX-XX income year?

Answer

No.

This ruling applies for the following period

Income year ending 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts

In your private ruling application, we were advised the following:

·         You commenced employment with Employer A.

·         You ceased employment with Employer A.

·         You completed several years of service with Employer A.

·         Employer A applied for a private ruling about the taxation of its termination payments.

·         You received an employment termination payment from Employer A.

·         You were then transferred to Employer B as part of a commercial arrangement between them and Employer A.

·         You commenced employment with Employer B.

·         You ceased employment with Employer B.

·         You completed several years of service with Employer B.

·         You requested Employer B to acknowledge your prior years of service with Employer A.

·         Employer B did not acknowledge your prior years of service with Employer A.

·         You received a genuine redundancy payment from Employer B.

·         The tax-free component of the genuine redundancy payment you received from Employer B was calculated only using your years of service with Employer B.

Within your private ruling application, we were provided with the following additional information:

·         A private ruling application completed by Employer A which requested confirmation from the Australian Taxation Office about the taxation of its termination payments and advised that any prior years of service with Employer A would only be recognised, upon subsequent retrenchment from Employer B, within the initial multiple-year period of their commercial arrangement.

·         An email sent from an employee of Employer A addressed to you and another employee of Employer A which included some of the advice provided by the Australian Taxation Office to Employer A that indicated that its termination payments should be taxed as employment termination payments and that any prior years of service with Employer A could be included in the assessment of the eligible service period, upon subsequent retrenchment from Employer B, within the initial multiple-year period of their commercial arrangement.

·         An email sent from you addressed to an employee of Employer A which sought clarification on whether your prior years of service with Employer A would be carried over and recognised by Employer B in the event that you were subsequently retrenched from Employer B including after the initial multiple-year period.

In an email sent from you addressed to a tax officer from the Australian Taxation Office, we received some further information about the genuine redundancy payment you received from Employer B for the 20XX-XX income year.

In the email, we were advised the following:

·         You were employed by Employer A. In your role with Employer A:

-    You were employed full-time.

-    An Enterprise Agreement applied to you.

-    You were a member of a union.

·         When you were made redundant by Employer A, you were transferred to Employer B at the same pay level. This was part of a commercial arrangement between Employer A and Employer B and was disclosed to the Australian Taxation Office.

·         You do not have a copy of the commercial arrangement which was agreed to by Employer A and Employer B.

·         You did not receive a termination notice from Employer A when you were made redundant by them.

·         The Australian Taxation Office has details about the payment summary you received from Employer A which consisted of an employment termination payment for a certain amount and an amount withheld for tax.

·         You would not have received an employment termination payment from Employer A if you had resigned voluntarily.

·         You were subsequently employed by Employer B. In your role with Employer B:

-  You were employed full-time.

-  An Enterprise Agreement applied to you.

-  You were a member of a union.

·         You were given an involuntary redundancy from Employer B.

·         The Australian Taxation Office has details about the payment summary you received from Employer B which consisted of an employment termination payment (taxable component) for a certain amount (Type R), an amount withheld for tax and a lump sum payment (tax-free component) for a certain amount (Type D).

·         You would not have received an employment termination payment from Employer B if you had resigned voluntarily.

·         There was no date when your employment at Employer A or Employer B would have expired except as part of the transfer that occurred due to their commercial arrangement and as a result of the involuntary redundancy you received from Employer B.

·         You did not have any connection or individual agreement with the management of Employer A or Employer B. You were treated the same as the other Employer A employees who were transferred to Employer B under their commercial arrangement and were later given an involuntary redundancy from Employer B.

·         Your prior years of service with Employer A were not included in the calculation of the tax-free component of the genuine redundancy payment you received from Employer B for the 2015-16 income year as it was calculated only using your years of service with Employer B.

Your contentions

In your private ruling application, you contended the following:

Paragraphs 69 and 70 of Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2) states that:

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.

TR 2009/2 indicates that the inclusion of any prior years of service with a previous employer in the calculation of the tax-free component of a genuine redundancy payment is conditional upon them being carried over and acknowledged by the new employer making the redundancy payment. However, it does not explain how the calculation of the tax-free component of a genuine redundancy payment is affected if confirmation by the new employer has not been provided.

Your prior years of service with Employer A and Employer B can be determined using the taxation records supplied to the Australian Taxation Office.

In an email sent from you addressed to a tax officer from the Australian Taxation Office, you also contended the following:

Your years of service with Employer A and Employer B should be used to calculate the tax-free component of the genuine redundancy payment you received from Employer B during the 2015-16 income year.

In a telephone conversation between yourself and a tax officer from the Australian Taxation Office, you also contended the following:

·         The terms and conditions of the commercial arrangement agreed to by Employer A and Employer B should not affect the determination of your years of service for the calculation of the tax-free component of the genuine redundancy payment you received from Employer B for the 20XX-XX income year.

Assumption

In a telephone conversation between yourself and a tax officer from the Australian Taxation Office, we advised that we would need to make an assumption to action your private ruling application.

During the telephone conversation, you agreed to the following assumption to action your private ruling application:

·         The genuine redundancy payment you received from Employer B met the requirements and conditions of section 83-175 of the ITAA 1997 for the 20XX-XX income year.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 82-130

Income Tax Assessment Act 1997, section 83-170

Income Tax Assessment Act 1997, section 83-175

Reasons for decision

Summary

Your prior years of service with Employer A cannot be used in the calculation contained within section 83-170 of the ITAA 1997 to determine the tax-free component of the genuine redundancy payment you received from Employer B for the 2015-16 income year.

Detailed reasoning

Tax-free component of a genuine redundancy payment

The tax-free component of a genuine redundancy payment is calculated under section 83-170 of the ITAA 1997. Amounts in excess of the tax-free component are taxed as an employment termination payment provided the requirements of section 82-130 of the ITAA 1997 have been met.

Section 83-170 of the ITAA 1997 states the following:

Tax-free treatment of genuine redundancy payments and early retirement scheme payments  

(a)   This section applies 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 × Years of service)

where:

base amount means:

(a)  for the income year 20XX-20XX - $XXX; and

(b)  for a later income year - the amount mentioned in paragraph (a) indexed annually.

service amount means:

(a)  for the income year 20XX-20XX - $XXX; and

(b)  for a later income year - the amount mentioned in paragraph (a) indexed annually.

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

The base amount for the 20XX-XX income year was $XXX. The service amount for the 20XX-XX income year was $XXX. The 'years of service' is determined based upon the number of whole years in the period (or sum of periods) of employment to which the payment relates.

Paragraphs 68-71 of TR 2009/2 provide significant guidance on determining the 'years of service' for the calculation of the tax-free component of a genuine redundancy payment. These paragraphs state the following:

Tax-free amount of a genuine redundancy payment

68. Some or all of a genuine redundancy payment may be non-assessable non-exempt income, and accordingly tax-free, under section 83-170.

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.

Generally, the most recent continuous period of employment with the relevant employer making the genuine redundancy payment is used to determine the 'years of service' for the calculation of the tax-free component of a genuine redundancy payment. Non-continuous periods of employment can also be taken into consideration.

In contrast, earlier years of service with a previous employer can only be taken into consideration where they have been carried over and acknowledged by the new employer and the genuine redundancy payment made by the new employer has been made in recognition of those earlier periods of employment.

Application to your circumstances

You commenced employment with Employer A and were later transferred to Employer B under a commercial arrangement between them and Employer A.

The commercial arrangement between Employer A and Employer B stipulated that any prior years of service with Employer A would only be recognised, upon subsequent retrenchment from Employer B, within the initial multiple-year period of their commercial arrangement.

You ceased employment with Employer B. You received a genuine redundancy payment from Employer B which consisted of an employment termination payment (taxable component) for a certain amount (Type R), an amount withheld for tax and a lump sum payment (tax-free component) for a certain amount (Type D).

The number of whole years in the period of employment to which the genuine redundancy payment you received from Employer B relates was your years of service with Employer B. It did not recognise, carry over or relate to your period of employment with Employer A and as a result your prior years of service with Employer A cannot be used within the calculation of the tax-free component of the genuine redundancy payment you received from Employer B.

The calculation of the tax-free component of the genuine redundancy payment you received from Employer B is therefore:

$XXX.00 + ($XXX.00 x the number of whole years with Employer B)

Any amount in excess of the tax-free component of the genuine redundancy payment you received from Employer B is taxed as an employment termination payment provided the requirements of section 82-130 of the ITAA 1997 have been met.