Edited version of private advice

Authorisation Number: 1051785122311

Date of advice: 04 December 2020

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 employment with Country 1?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2020

The scheme commences on:

1 July 2019

Relevant facts and circumstances

Your date of birth is late 197X.

You commenced employment with the Employer in Country 1 from early 199X until the end of 200X.

You have provided a copy of a Contract of Employment in relation to commencing a permanent position (the Position) with the Employer early 200X that includes the following relevant clauses:

Clause 2: "Your previous employment with the Employer which began in early 199X shall count as part of your continuous employment with the Employer". Between early 199X and early 200X"

Clause 3 "Your place of work will be in the premises of Country 1, but you may be required to work elsewhere in Country 1 or worldwide "

The following have been provided by you to confirm the continuity of your employment with the Employer:

•         In late 200X you immigrated to Country 2 but continued to work remotely for the Employer from City A in the same role until late 201X.

•         The document entitled "Remote working project Country 2" details your transition to working remotely in early 200X.

•         After a one-year trial the copy of the final review document provided confirms the agreement continued.

In mid-201X, you were informed through a consultation document that you were one of eight legal advisers in the Employer's Program put into a pool at risk of compulsory redundancy

During this time, you submitted an application to the voluntary redundancy scheme.

You have provided a copy of a letter dated late 201X from the Employer confirming:

•   your employment with the organisation will terminate in late 201X

•   you would receive an enhanced redundancy pay which will be calculated in the same way as the payments that will be made to employees who are made compulsorily redundant

Your employer accepted your voluntary redundancy application and stated what your redundancy payment would be:

•         The Provisional Calculation of Redundancy Payment notes the completed years of service as 20 and a redundancy of Amount 1.

•         As per your final payment advice however the tax-free amount was calculated at Amount 2 based on the base amount plus a service amount (Service amount and less than 20 years of service).

When paid, the tax-free amount was based on 14 years of service. The remainder of the GRP was paid as an Employment Termination Payment.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 27A(19).

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.

Income Tax Assessment Act 1997 subsection 83-175(1).

Reasons for decision S

Summary

The calculation of your years of service in relation to the tax-free amount of your redundancy payment will include your employment in Country 1 and Country 2.

Detailed reasoning

Genuine redundancy payment

1.    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). This section states:

(1) A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee's position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of dismissal.

(2) A genuine redundancy payment must satisfy the following conditions:

(a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach the age or complete the period of service (as the case may be);

(b) if the dismissal was not at arm's length - the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's length;

(c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after dismissal.

(3) However, a genuine redundancy payment does not include any part of a payment that was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later time.

Payments not covered

(4) A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

2.    Under subsection 83-175(1) of the ITAA 1997, a GRP is a payment resulting from:

(i)            a dismissal;

(ii)           the employee's position is genuinely redundant; and

(iii)          the payment exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the dismissal.

3.    In this case, the termination of your employment is accepted as a redundancy. Your employment was terminated following a decision made by the Employer to make your position redundant as a result of changes made to the structure of the organisation.

Tax-free amount of a GRP

4.    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.

5.    The formula for working out the tax-free amount is:

Base amount + (Service amount x 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.

6.    For the purposes of subsection 83-170 (3) of the ITAA 1997, the base amount for the 2019-20 income year is $10 638 and the service amount is $5 320. Any amount that the employee 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.

7.    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'

8.    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.

9.    Paragraphs 69 and 70 of TR 2009/2 states:

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.

10. In discussing the meaning of the term years of service, the explanatory memorandum to the Taxation Laws Amendment (Superannuation) Act 1992 (the EM) which inserted the former subsection 27A(19) into the Income Tax Assessment Act 1936 states:

The relevant period of completed service is the same as the period defined in paragraph (a) of the definition of eligible service period in subsection 27A(1). That is, the period, or aggregate of the periods, of the employment to which the payment relates. However, eligible service period is expressed in days, while the service period for subsection 27A(19) purposes is expressed in whole years.

11.  Generally, the years of service will be the employee's most recent continuous period of employment with the relevant employer making the 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 payment is made in recognition of that earlier employment and/or related employment.

12.  In your case, in the provisional calculation of your redundancy payment, the date your continuous employment began is noted as early 199X, when you commenced employment in Country 1.

13.  Therefore, it is recognised that your redundancy payment is calculated with reference to your period of employment in both Country 1 and Country 2. Accordingly, for the purposes of calculating the tax-free threshold your years of service is to include your employment period in Country 1 and Country 2.