Private ruling: Genuine redundancy payment
Published: September 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Has the tax-free amount been applied correctly in respect of the severance payments you received from your former employer? | A1: No.

Relevant facts and circumstances: You were employed by the Former Employer in two different positions, under two independent part-time contracts. In the 20XX income year you commenced employment with the Former Employer in Position one (P1). In the 20XX income year you commenced employment with the Former Employer in Position two (P2). P1 and P2 were made genuinely redundant by the Former Employer and your employment in roles P1 and P2 was terminated on the same date in the 20XX income year. The Former Employer paid you a severance payment of $X (exclusive of unused annual and long service leave) as a result of the redundancy of P1, and a severance payment of $Y (exclusive of unused annual and long service leave) as a result of the redundancy of P2, on the same date, in the 20XX income year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Paragraph 83-15(a) | Income Tax Assessment Act 1997 Subsection 83-10(2) | Income Tax Assessment Act 1997 Subsection 83-80(1) | Income Tax Assessment Act 1997 Subsection 83-85(1) | 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) All references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision: Summary: A portion of the separation payments is a genuine redundancy payment. The tax-free amount of the genuine redundancy payment is calculated in accordance with subsection 83-170(3). The remaining amount is an employment termination payment and treated as assessable income in the 2016-17 income year. The unused annual leave amount and unused long service leave amounts are not employment termination payments. These amounts are included in your assessable income in the 20XX income year. However, as these amounts were made in connection with a genuine redundancy, you are entitled to a tax offset on these amounts. | Detailed Reasoning - Tax treatment of genuine redundancy payments: A genuine redundancy payment is tax-free up to a certain limit, calculated in accordance with section 83-170. Any amount in excess of the tax-free amount is taxed as an employment termination payment. You were employed under two independent contracts with the one employer. Both P1 and P2 positions were made redundant by the Former Employer and your employment in each role was terminated on the same date. In accordance with paragraph 76 of Taxation Ruling TR 2009/2 Income Tax: genuine redundancy payments (TR 2009/2), where multiple payments for one dismissal due to redundancy are received, the Commissioner's view is: …the tax-free amount of a genuine redundancy payment can only be claimed once for any given termination of employment because of redundancy. Accordingly, in your case, while it may be possible to identify more than one severance payment, you were employed by the one employer. There was only one dismissal, with the severing of both roles caused by the redundancy of both positions. The tax-free threshold can only be applied once. The Commissioner's view as per paragraph 74 of TR 2009/2 is that the relevant legislative provisions …operate to unify any such payments as a single sum attributable to redundancy when working out the tax treatment of the payments. Applying this cumulative approach to the facts in your case, the two severance payments you received in respect of your former positions, must be added together before the tax-free amount is calculated. As per subsection 83-170(3), the formula for working out the tax-free amount is: Base amount + (Service amount × Years of service) 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 2016-17 income year: Base amount means $9,936; and Service amount means $4,969. | Detailed Reasoning - Taxation treatment of unused annual leave and long service leave: Unused annual leave and unused long service leave payments are not employment termination payments. These payments are included in your assessable income for the 2016-17 income year and subject to marginal rates of tax (subsection 83-10(2) and subsection 83-80(1)). However, as it has been determined that your former positions were genuinely redundant, you are entitled to a tax offset which ensures that the rate of tax on these payments does not exceed 30% (excluding Medicare levy) (paragraph 83-15(a) and subsection 83-85(1)).