Published: November 2012
Ruling period: 2012-13 income year
Date scheme commenced: 1 July 2012

Ruling: Q1: For the purposes of subsection 83-170(3) of the Income Tax Assessment Act 1997 (ITAA 1997), does your years of service with Employer B include your earlier period of employment with Employer A? | A1: No.

Relevant facts and circumstances: You commenced employment with Employer A in April 1990. You were outsourced from Employer A to Employer B several years ago. You advised that you were made redundant by Employer B during the 2012-13 income year. You advised that at the time of outsourcing a government organisation indicated that you should be entitled to the years of service at Employer A and Employer B in determining the tax free component of any future redundancy. The Employment Separation Certificate from Employer B during the 2012-13 income year stated that you commenced employment with Employer B several years ago and ceased employment with Employer B during the 2012-13 income year. The reason for separation was redundancy. A total gross payment was made to you by Employer B. The payments you received included the following: Redundancy In lieu of notice Bonus payments Annual leave Long service leave Job search You advised your employer calculated your redundancy entitlements in accordance with Employer B's Enterprise Agreement 2010-2012 which resulted in your payment being based on your time with Employer B. Your employer has calculated the gross amount of the Genuine Redundancy Payment (GRP) to be an amount which includes the redundancy payment, in lieu of notice, bonus payments and job search amount. Your employer has calculated the tax free amount to be an amount and the employment termination payment to be an amount. You are under 60 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 83-175 | Income Tax Assessment Act 1997 Subsection 83-175(1) | Income Tax Assessment Act 1997 Subsection 83-175(2) | Income Tax Assessment Act 1997 Subsection 83-175(3) | Income Tax Assessment Act 1936 Subsection 27A(19)

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 - Detailed reasoning: 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 ITAA 1997. Section 83-170 of the ITAA 1997 applies to determine the tax free treatment of a GRP. Section 83-170 places a limit on the amount of a GRP that is eligible for concessional tax treatment and states: 1. This section applies if you receive a genuine redundancy payment or an early retirement scheme payment. 2. 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. 3. Work out the amount using the formula: Base amount + (Service amount Years of service) where: base amount means: (a) for the income year 2006-2007 - $6,783; and (b) for a later income year - the amount mentioned in paragraph (a) indexed annually. service amount means: (a) for the income year 2006-2007 - $3,392; 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. Any amount that the taxpayer receives which falls below the limit determined under subsection 83-170(3) of the ITAA 1997 will attract no tax. That is, such an amount will be tax free. You advised that your position was made redundant by Employer B during the 2012-13 income year and it is accepted that your position was made genuinely redundant on that date. You requested a private ruling to determine whether your earlier period of service with Employer A can be included in the calculation of the tax-free amount of your genuine redundancy payment. As mentioned above, section 83-170 of the ITAA 1997 applies to determine the tax-free treatment of a GRP. The tax-free amount is calculated by a formula under subsection (3): 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. For the purposes of subsection 83-170(3) of the ITAA 1997, the base amount for the 2012-13 income year is $8,806 and the service amount is $4,404. Any amount that a taxpayer receives which falls below this limit will attract no tax, that is, such an amount will be tax-free. 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. The Commissioner has issued Taxation Ruling TR 2009/2 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. 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 recent continuous period of employment with the relevant employer making the employment 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. As previously stated, only if the employment 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 commenced employment with Employer A several years ago. You commenced employment with Employer B several years ago when you were outsourced from Employer A to Employer B. You advised that you were made redundant by Employer B and terminated employment during the 2012-13 income year. However the termination payment you have received from Employer B has only been calculated with reference to your time at Employer B and does not recognise any service with Employer A. Consequently the years of service to which the genuine redundancy payment relates is a specific number of whole years of service from the date you commenced employment with Employer B to the date you ceased employment with Employer B. Therefore, the tax-free amount is calculated as follows: For the 2012-13 income year, the base amount is $8,806 and the service amount is $4,404. Therefore in accordance with subsection 83-175(3) of the ITAA 1997, the tax free part of a genuine redundancy payment you can receive in the 2012-13 income is an amount. The tax free amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997. The amount remaining is an employment termination payment. In 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.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Subject: Redundancy - Years of Service