Private ruling: Genuine redundancy payment
Date of advice: 16 January 2017
Published: June 2017
Ruling period: Year ending 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Was the tax-free amount of a genuine redundancy payment received by you correctly calculated under subsection 83-170(3) of the Income Tax Assessment Act 1997? | A1: Yes

Relevant facts and circumstances: You commenced employment with the Employer in some years ago. Several years later you applied for leave due to a work related illness and began to receive a monthly benefit of a percentage of your salary through your superannuation provider. In 20XX, the Employer notified you that your position had been made redundant. You engaged a third party to negotiate a separation payment on your behalf. A first Deed of Release (the Unsigned Deed) was provided to you where your termination of employment was to end on a date in the 20XX year. A severance calculation sheet was provided by the Employer. You did not sign the Unsigned Deed. A second Deed of Release (the Signed Deed) was signed by you soon after in 20XX which stated in part: ● The termination date ● The payment to be made to you from the Employer ● The timing of the payment A severance calculation sheet was provided by the Employer which stated: ● Your exit date ● Your start date ● Your service period adjusted for leave without pay ● The gross amount of the payment to be taxed at the applicable rate ● The maximum tax free limit of the genuine redundancy payment In correspondence you provided, which refers to discussions held by you with the Employer, it shows: ● in calculating the tax free amount of the severance payment the Employer maintained that it met its obligation as set out in the Signed Deed to pay a gross amount taxed at the applicable rate; ● the Employer stated that in calculating the applicable rate of tax it did not take into consideration periods of leave without pay; ● the Employer confirms that an indicative quote was initially provided which did not factor in periods of leave without pay; ● the Employer advised that the years of service calculation refers to the number of whole years the employer recognises to which the payment relates; ● the Employer advised the EA provisions define what constitutes service and that the correct applicable tax rate has been applied on the basis of your years of service. You provided a copy of the EA which includes provisions which stated what shall count as service in determining entitlement of an employee to leave and for other purposes.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 27A(19) | Income Tax Assessment Act 1997 section 82-130. | Income Tax Assessment Act 1997 section 82-135. | 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 the payment you received from the Employer under the Signed Deed only relates to your service with the Employer, which excludes the period of leave without pay (lwop), only the years of service excluding the period of lwop can be used in calculating the tax-free amount of the genuine redundancy payment under subsection 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - 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. In your case, the facts provided show that the severance payment made to you is 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) of the ITAA 1997 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. The formula for working out the tax-free amount is: Base amount + ( Service amount × Years of service ) For the 20XX-YY income year: Base amount means $9,936; Service amount means $4,969; and Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates. The explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Act 2007 states at paragraph 4.61: The tax free part of a payment is determined by reference to a base amount plus an amount per year of service. This replicates the existing concession offered to such payments. The existing concession referred to subsection 27A(19) of the Income Tax Assessment Act 1936 (ITAA 1936). In discussing the meaning of the term years of service, the Explanatory Memorandum to the Taxation Laws Amendment (Superannuation) Act 1992 which inserted subsection 27A(19) into the ITAA 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.(emphasis added) The Commissioner issued Taxation Ruling TR 2009/2, titled 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. Paragraph 69 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. Where an employer makes the payment in consequence of the termination of employment, the years of service is the period to which that payment relates. Therefore, only if the employment termination payment is made in recognition of a period of employment can the period be taken into consideration. Your employment commenced some years ago and ceased in 20XX. The Employer, as guided by the EA, did not recognise the period of unpaid leave in making the severance payment calculation for the Signed Deed. As such, the Employer recognised X years as the 'years of service' to which the GRP relates. The facts provided show that the Employer does not consider the period of unpaid leave as relating to the GRP made to you under the Signed Deed. Accordingly, the tax-free part of a GRP you received in the 20XX-YY income year under subsection 83-175(3) of the ITAA 1997 is: $9,936 + ($4,969 × X) Therefore, this portion of the GRP you received is non-assessable and non-exempt income. In relation to the amount of the GRP in excess of this tax-free amount it is taxed as an employment termination payment.