Private ruling: Genuine redundancy
Date of advice: 20 June 2017
Published: October 2017
Ruling period: Income year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: 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 the Previous Employer? | A1: Yes

Relevant facts and circumstances: You commenced employment with the Employer in early 2016. Prior to employment with the Employer you were employed by the Previous Employer for a number of years (Prior Service). On commencement with the Employer, your Prior Service with Previous Employer was recognised for the purposes of long service leave. The Employer also recognised your accrued annual leave from the Previous Employer. In a letter the Employer advised that following an organisational restructure your position of had been made redundant and your position with the Employer was to cease immediately. In late 2016 you received a redundancy payment from the Employer in accordance with your employment contract. You advise that in calculating the tax free amount of your redundancy payment, the Employer only included the service with the Employer and not your completed years of service with the Previous Employer. You contend that the tax-free amount of your redundancy payment under section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997) should include your years of service at both the Previous Employer and the Employer as they are periods of employment to which the genuine redundancy payment relates. This is further supported as the Employer recognised your years of service with the Previous Employer in the following ways: 1. On commencement i. Pursuant to the relevant legislation governing your employment recognising service at the Previous Employer; ii. Accepting liability for annual leave you accrued at the Previous Employer; and iii. Recognising service with the relevant employer covered by the Enterprise Agreement. 2. On making the redundancy payment, which was calculated by reference to your completed years of service with any relevant employer.

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: Summary: The calculation of your years of service in relation to the tax free amount of your redundancy payment will include your service with the Previous Employer. | Detailed Reasoning - Genuine redundancy payment: 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)). 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. 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. | Detailed Reasoning - Tax-free amount of 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) is not assessable income and is not exempt income. The formula for working out the tax-free amount is: | Detailed Reasoning - 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 2016-17 income year is $9,936 and the service amount is $4,969. 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. 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. | Detailed Reasoning - Calculation of 'years of service’: 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. 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. 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. 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. In your case, on commencement of employment with the Employer, your earlier years of service with the Previous Employer were recognised for both long service leave. Further, your accrued annual leave from the Previous Employer was recognised. In addition, when calculating the redundancy payment due to you, the Employer has included your service with the Previous Employer. Therefore, it is recognised that your redundancy payment is calculated with reference to your period of employment with both the Previous Employer and the Employer. Accordingly, for the purposes of calculating the tax free threshold your years of service is to include your employment period with both the Employer as well as the Previous Employer.