Private ruling: Genuine redundancy
Date of advice: 29 September 2015
Published: November 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Do 'years of service' for the purposes of the calculation of the tax-free part of a genuine redundancy payment under section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997) include your service with related entities of your employer? | A1: Yes.

Relevant facts and circumstances: You have been continuously employed by subsidiaries of the parent company of the Employer for more than 10 years. During the 2013-14 income year you commenced employment with the Employer as a result of a transfer from one of the parent company's overseas subsidiaries. Your employment contract (the Contract) states that the Employer, for purposes of continuity, recognised the commencement date of your employment with the parent company's subsidiaries. In relation to termination of employment (where notice is given) and payment on termination, clauses in the Contract state: • Your employment and the agreement may be terminated by the Employer for any reason by providing four (4) weeks' Notice to the Employee or by making a payment in lieu of such notice based on the Employee's salary. • The Employee may terminate the Employment and the agreement by providing four (4) weeks' notice to the Employer. The Employer may, in its absolute discretion, accept a lesser period of Notice. • On termination of the Employment and the agreement the Employer must pay to the Employee all unpaid salary (pro-rata to the date of termination), plus all accrued annual leave as well as any expenses properly payable to the Employee under the agreement up until the date of termination, but no further amount. In a letter from the Employer, it was stated your employment was terminated because your job had been made redundant. In the Letter it also stated: • you were not required to work out your notice period • your last day of work • the Employer would pay you pay in lieu of notice based on a specified number of weeks; and • a redundancy amount equivalent to a specified number of weeks' salary. The Employer's provision of the redundancy pay is in line with the Fair Work Ombudsman's guideline for employees with at least 10 years of service. A calculation sheet which was prepared by the Employer has been provided which shows the entitlements paid to you included unused annual and long service leave, payment in lieu of notice and a redundancy payment. Copies of the PAYG payment summary - employment termination payment and PAYG payment summary - individual non-business received by you for the 2014-15 income year have been provided.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 83-175 | Income Tax Assessment Act 1997 subsection 83-170 Summary | The sum of the payment in lieu of notice and the redundancy payment is a genuine redundancy payment. As this payment is below the calculated tax-free amount, all of this payment is non-assessable and non-exempt income. Accordingly, it is not to be included in your income tax return for the 2014-15 income year. | Detailed reasoning | Genuine redundancy payment | A payment made to an employee is a genuine redundancy payment if it satisfies all of the criteria set out in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997) which 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 arms' length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms' 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. | (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)). | Subsection 82-135 of the ITAA 1997 includes (among others): | _ superannuation benefits; | _ the payment of a pension or annuity; and | • unused annual leave (paragraph 82-135(c)) or long service leave payments (paragraph 82-135(d)). | Accordingly, the payments you received for unused annual leave and long service leave are not genuine redundancy payments pursuant to subsection 82-135(4) of the ITAA 1997. | As the facts show all the conditions under section 83-175 of the ITAA 1997 have been satisfied, it is accepted that the redundancy payment and payment in lieu of notice is a genuine redundancy payment. | Tax-free amount | Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment 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 2014-15 income year: | Base amount means $9,514; | Service amount means $4,758; and | Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates. | Your Employer recognised that your employment with the parent company and its subsidiaries, of which the Employer is one, commenced more than 10 years ago and ceased during the 2014-15 income year. Furthermore, the calculation of the redundancy payment shows that the Employer recognised your service as being greater than 10 years of service. Hence the 'years of service' to which the genuine redundancy payment relates, as shown and indicated by the facts provided, also relates to your service with the subsidiaries. | Accordingly, in calculating the tax-free part of the genuine redundancy payment you received in the 2014-15 income year under subsection 83-175(3) of the ITAA 1997 your years of service with the subsidiaries are also included. | As the genuine redundancy payment you received is below the calculated tax-free amount, the entire amount of the payment is the tax-free part. This tax-free amount is non-assessable and non-exempt income under subsection 83-170(2) of the ITAA 1997. | Consequently no part of the genuine redundancy payment is required to be included in your income tax return for the 2014-15 income year.