Private ruling: Termination/Genuine redundancy payment - years of service
Published: October 2012
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is any part of the employment termination payment a tax-free part of a genuine redundancy payment? | A1: No. | Q2: What years of service apply to a payment received on termination of employment? | A2: Not applicable.

Relevant facts and circumstances: You are currently working with your employer ("current employer"). You have been offered a voluntary redundancy package by your current employer. You have completed numerous years of service with your current employer. Prior to year 200X, you took a break with your employer. During this period, you worked for other employers. You re-commenced your employment with your current employer in mid 200X. Your current employer indicated to you that your employment termination payment ("ETP") will only be paid in respect of the last specific years. You are over 65 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-10. | Income Tax Assessment Act 1997 Section 82-135. | Income Tax Assessment Act 1997 Paragraph 82-135(e). | Income Tax Assessment Act 1997 Subsection section 82-145 | Income Tax Assessment Act 1997 Subsection 82-155(2) | 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 1997 Subsection 83-175(4).

Reasons for decision: Detailed Reasoning - Summary of decision: No part of the proposed payment to be made to you by your current employer is a tax-free part of a genuine redundancy payment ("GRP"). This is because the termination of your employment occurred after you reached age 65. Accordingly, your query in relation to the years of service in respect of calculating the tax-free part of a GRP is not relevant. The proposed termination payment is assessable as an employment termination payment in the year in which it is received. | Detailed Reasoning - Detailed reasoning: Genuine redundancy payment A payment made to an employee is a 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 employees 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 employees 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. 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)). Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. Paragraph 82-135(e) provides that the part of a GPR worked out under section 83-170 is not an ETP. Termination occurred before age 65 or expiration of fixed term Subparagraph 83-175(2)(a)(i) of ITAA 1997 indicates that in order for a payment to qualify as a GRP, an employee must be dismissed before the date that he or she turned age 65 or such earlier date on which his or her employment would have necessarily terminated under the terms of employment because of the employee attaining a certain age or completing a certain period of service. As you are already over 65 years of age, therefore this condition is not satisfied. As one of the conditions has not been satisfied, the payment cannot be a GRP. Accordingly, the payment will be assessable as an ETP in the income year in which it is received. | Detailed Reasoning - Years of service: As it was established that the proposed payment to be made to you is not a GRP, your query in relation to the years of service in respect of calculating the tax-free part of a GRP is not relevant. | Detailed Reasoning - Eligible service period: This is used to calculate what were formerly known as the pre-July 1983 and post-June 1983 components of an ETP. Where an ETP is made by an employer, the eligible service period is the whole period of employment to which the payment relates. Paragraph 4 of Income Tax Ruling IT 2168 states: "Where an eligible termination payment (ETP) is made in consequence of the termination of a person's employment, the eligible service period is the period, or the aggregate of the periods, of the employment to which the ETP relates. Whether an ETP "relates" to particular employment is a question of fact in each individual case. It is to be taken that the eligible service period is the person's total period of most recent continuous service with the employer making the payment (or contributing to the superannuation fund making the payment) and any related employer or employers (including any employer entity taken over by the employer or related employer or any entity in a sequence of takeovers ending with the takeover by the employer or related employer), unless there is evidence that shows that the payment was made in recognition of a different period of employment." In your case, your total period of most recent continuous service with the Employer is Y years which is the period to which the proposed redundancy payment relates. Unless there is evidence to suggest otherwise, this will be used as the eligible service period when calculating the pre-July 1983 and post-June 1983 components of the ETP. | Detailed Reasoning - Tax Treatment of the employment termination payment: An ETP made after 1 July 2007 will be comprised of the following components: · Tax free component - this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and · Taxable component - the amount remaining after deducting the tax free component from the total payment. The tax free component is not assessable income and is not exempt income. The taxable component is included, in full, as assessable income. In relation to your proposed termination payment, there is no pre-July 83 segment as the eligible service period to which the payment relates does not cover any period of employment with the Employer prior to year 200X. Furthermore, there is no invalidity segment for the purposes of section 82-150 of the ITAA 1997 because the proposed payment to be made is not due to the loss of your ability to be gainfully employed due to suffering from ill-health. Consequently, the proposed termination payment will only consist of a taxable component (section 82-145 of the ITAA 1997). The taxable component is subject to tax, depending on the person's age when the payment is received. For recipients above preservation age, the taxable component of an ETP is taxed at no more than 15%, for amounts below the employment termination payments cap ($175,000 for the 2012-13 income year) and at the top marginal rate for amounts above the cap (section 82-10 of the ITAA 1997). Medicare levy of 1.5% is added to the tax rate that applies. Preservation age is the age at which retirees can access their superannuation benefits. For a person born before 1 July 1960, their preservation age is 55. | Detailed Reasoning - Conclusion: In your case, because: · you will be over your preservation age on the last day of the income year in which the payment will be made, and · the employment termination payment you are receiving does not exceed the employment termination payments cap, You will be taxed at no more than 15%, plus Medicare levy on the taxable portion of the ETP.

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