• The impact of this case on ATO policy is discussed in Decision Impact Statement: Perfrement and Commissioner of Taxation (Published 16 June 2011).

PERFREMENT v FC of T

Members:
Dr G Hughes M

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2011] AATA 264

Decision date: 20 April 2011

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Dr G Hughes (Member)

1. The principal issue for determination in this matter was whether a payment made to the Applicant by his employer in 2008 was a transitional termination payment pursuant to section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (the Act). If so, a related issue was whether the Applicant could direct the redundancy payment to a superannuation or other entity, pursuant to section 82-10F of the Act.

Background

2. The Applicant started working at Mobil Oil Australia Limited (Mobil), under a contract dated 26 November 1992.

3. The terms of employment were subject to company policies and procedures as amended from time to time. These policies and procedures were available for perusal upon request.

4. The Applicant's employment was terminated by redundancy on 30 September 2008.

5. When the Applicant began working at Mobil, the employer had in place its 1991 redundancy policy. Mobil amended this policy in May 1995, July 2005 and July 2008, during the term of the Applicant's employment.

6. The effect of the July 2008 policy amendment was to advise employees that their redundancy entitlement at law no longer included the option to roll over the redundancy payment into a superannuation fund.

7. The transitional provisions in Division 82 of the Act only apply in circumstances where the payment formula was capable of being determined as at 9 May 2006. Section 82-10(1) of the Act states that Division 82 will deem a payment to be a transitional termination payment if it is received by an employee after 1 July 2007, pursuant to a contractual entitlement which was in force prior to 10 May 2006. Payments that are not classifiable as transitional termination payments are taxed in accordance with section 82-10 of the Income Tax Assessment Act 1997 and may not be rolled over into superannuation but instead must be taken in cash. A transitional termination payment becomes a directed termination payment if the individual elects, within 30 days after receipt of a pre-payment statement from the employer, that the payment is to be made into a superannuation fund. Income tax is not payable on directed termination payments.

8. Following his redundancy in September 2008, the Applicant asked his employer to roll over his termination payment into a nominated superannuation fund. The employer declined on the basis that the payment was not a transitional termination payment. The Respondent's rationale was that the payment had been made in accordance with a contractual entitlement pursuant to redundancy guidelines that had come into force after 10 May 2006.

9. The Applicant's position was that he and his employer had not entered into a new contractual arrangement in relation to redundancy after 10 May 2006. The fact that the employer changed its redundancy policy from time to time did not, by that fact alone, change the fact that the payment was determined by reference to a formula in place prior to 10 May 2006.

Discussion

Threshold issue

10. It is necessary to deal with a preliminary issue raised by the Applicant. The Applicant observed that this proceeding involved an application for review of the Respondent's decision to disallow an objection to a private ruling. The Respondent had previously contended that the Applicant's redundancy payment is not a transitional termination payment because it was made pursuant to a contract that came into effect after 10 May 2006.

11. The parties agree that a new contract of employment made after 10 May 2006 (or the variation of an existing pre-10 May 2006 contract after that date) would operate to prevent any subsequent redundancy payment made to the Applicant from being treated as a transitional termination payment.

12. The Applicant asserted that the Respondent had forfeited the right to contest the Applicant's objection because the Respondent had apparently abandoned its previous assertion that it was possible for the employer to vary the contract without the knowledge of the Applicant, and instead relied on the fact that the original contract activated subsequent policy changes.

13. The Respondent countered that it was open to the Tribunal to conclude that the Respondent's opinion expressed in the private ruling was correct for reasons other than those advanced by the Respondent at the time. However, the Tribunal could not re-investigate the facts upon which the Respondent originally based its opinion: see
Colonial First State Investments Limited v Commissioner of Taxation [2011] FCA 16. The Tribunal agrees with this submission.

14. The Tribunal is of the opinion that the Respondent limited its submission to the facts as identified in the private ruling, albeit amending its legal analysis of those facts. There is nothing to prevent the Respondent from proceeding in this manner.

Legislation

15. Section 82-10 of the Act relevantly provides:

• "(1) This Division applies in relation to a life benefit termination payment received by you on or after 1 July 2007 if:
  • (a) the payment is received by you because you are entitled to it under a written contract, a law of the Commonwealth, a State, a Territory or anther country, an instrument under such a law, a collective agreement within the meaning of the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009 or an AWA within the meaning of that Act; and
  • (b) the entitlement is provided for under that contract, law, instrument or agreement as in force just before 10 May 2006.
• …
• (3) [This Division] applies in relation to a life benefit termination payment only to the extent that the contract, law or agreement as in force just before 10 May 2006 specifies the amount of the payment, or a way to work out a specific amount of the payment.
• (4) For the purpose of subsection (3), a specific amount can be worked out in ways including either or both of the following:
  • (a) by a method or formula for working out the amount;
  • (b) by provision for you or another person (or entity) to make a choice between forms of payment allowing amounts to be worked out as provided by subsection (3) and paragraph (a) of this subsection.

Example:

For paragraph (b), a specific amount of a life benefit termination payment that you receive on 1 July 2007 can be worked out from the terms of your written contract if the contract provided (just before 10 May 2006) for you to choose between payment in the form of a cash amount of $100,000 or the transfer to you of 10,000 shares in a specified company.

…"

16. On the question of directed termination payments, section 82-10G of the Act provides:

"A directed termination payment made on your behalf, that you are taken to receive under section 80-20 of the Income Tax Assessment Act 1997, is not assessable income and is not exempt income."

17. Section 82-10F(1) provides:

• "(1) A transitional termination payment (or part of such a payment) is a directed termination payment if:
  • (a) the individual chooses, in accordance with this section, to direct the payment (or part of the payment) to be made; and
  • (b) the payment (or party of the payment) is made on the individual's behalf as directed."

18. A directed termination payment may only be made in respect of a payment that is a transitional termination payment. Section 82-10F(2) provides:

• "(2) An individual may choose, within 30 days after a pre-payment statement about a transitional termination payment is given to the individual under section 83-10E, to direct the payer to use all or part of the payment to make a payment on behalf of the individual:
  • (a) to a complying superannuation plan; or
  • (b) to purchase a superannuation annuity."

Transitional termination payment

19. Division 82 of the Act provides transitional rules applicable to a transitional termination payment. Its objective is to reduce the risk of employees who were entitled to termination of employment benefits before 10 May 2006 terminating their employment before that date in order to access the more generous pre-1 July 2007 taxation regime, such as the ability to roll over an unlimited amount of such a payment into the concessionally-taxed superannuation system. The transitional rules effectively presumed the status quo for such employees, meaning (as indicated above) that payments to which the transitional arrangements apply are not taxed under the normal employment termination payment provisions of the Income Tax Assessment Act 1997.

20. Section 82-10 requires that a payment, if it is to qualify as a transitional termination payment, must be made pursuant to an entitlement provided for under a contract in force before 10 May 2006; and a specific amount of that entitlement must be capable of precise calculation by reference to a term of that contract in force prior to that date. A new contract entered into after 10 May 2006, or a variation to contract terms relevant to an employee's entitlement to redundancy payments, will prevent a termination payment being classified as a transitional termination payment.

21. The Respondent contended that the terms of the July 2008 redundancy policy differed in substance from those contained in the pre-10 May 2006 redundancy policy. The termination payment was calculated and made in accordance with the terms contained in the July 2008 policy. As such, the calculation had clearly not been made in accordance with the terms of the Applicant's employment agreement in force prior to 10 May 2006, and accordingly the payment could not be regarded as a transitional termination payment.

22. Key changes introduced by the July 2008 policy, as summarised by the Respondent, were that:

• (a) references to eligible termination payments, reasonable benefit limits and a superannuation surcharge were removed;
• (b) the taxation summary was updated to reflect the current taxation treatment of various categories of termination payments, redundancy payments and superannuation payments; and
• (c) references to an employment termination payment (ETP) rollover option for redundancy payments were removed.

23. The effect of these changes, according to the Respondent, was that the Applicant's redundancy entitlement no longer provided for the option to rollover the redundancy payment into a superannuation fund. Further, the final after-tax amount of the payment received by the redundant employee changed as a result of the implication of current taxation obligations.

24. The Applicant drew the Tribunal's attention to passages in
Riverwood International Australia Pty Ltd v McCormick (2000) 177 ALR 193 and
Visscher v Giudice (2009) 239 CLR 361. The Applicant contended that there were parallels with the present case, in that there was a misconception by one party that a unilateral variation or rescission was effective in binding the other party. In the event, little turns on this case law. The question of unilateral contract variation is not an issue that the Tribunal considers pertinent to its determination.

25. More significant was the Applicant's submission that it was incongruous for the Respondent to assert that the employer's redundancy policy must be taken to have changed because the tax laws changed and the employer purported to publish, in effect, a memorandum of advice to its employees identifying the changes in the tax laws.

26. As submitted by the Applicant, the real issue was whether the method of compensation in the event of redundancy was varied as between the pre-10 May 2006 redundancy policy and the post-10 May 2006 redundancy policy. The employer's redundancy policy, as set out in the pre-10 May 2006 redundancy policy, was in fact not different in any way from the redundancy policy as set out in the post-10 May 2006 redundancy policy. The application of the tax laws to those benefits may have altered following the initial publication of the July 2005 redundancy policy, but not the redundancy benefits themselves.

27. In other words, there was no distinct post-10 May 2006 redundancy policy as such. Rather, the July 2005 redundancy policy continued, albeit with an updated information statement as to how the tax laws had varied in the meantime.

28. It followed, according to the Applicant, that the redundancy payment made to the Applicant was the redundancy payment to which he was entitled under the July 2005 redundancy policy. The redundancy payment made to the Applicant in September 2009 should therefore properly be considered a transitional termination payment.

29. The Applicant contended that the payment by an employer to an employee of a transitional termination payment could not later be directed to be rolled over. The Applicant further contended that this right could only be lost if the Applicant failed to make an election to effect a roll over within 30 days after being provided with a pre-payment statement: section 82-10F(2). As Mobil had never provided the Applicant with a pre-payment statement, the right to direct roll over had not been enlivened.

30. The Respondent asserted that the decision of the employer (against the express instructions of the Applicant) to pay the moneys directly to the Applicant (net of withholding tax) excused the employer from its statutory obligations. According to the Applicant, this was inconsistent with the statutory regime, which contemplated that terminated employees who were entitled to the payment of a transitional termination payment had a statutory right of election to effect the roll over of that termination payment.

Decision

31. The employer's redundancy policy and procedures were incorporated by reference as terms of the Applicant's contract of employment.

32. Clause 5 of the contract stated that the Applicant agreed to be bound by the company policies and procedures as amended from time to time.

33. On a date after 10 May 2006, the employer republished its redundancy policy primarily to reflect the changes in the law in regards to superannuation and employment termination payments.

34. The Tribunal is of the opinion that the policy published by the employer in July 2008 was neither a new contract nor a variation of the existing contract. The redundancy policy published in July 2008 was essentially a memorandum of advice to employees as to the effect of newly introduced tax laws. It was, in essence, self-evident advice contained within a company policy document. There was, as submitted by the Respondent, no change to the method of compensation in the event of redundancy, but rather a change in the application of tax laws to those benefits.

35. The Tribunal may have reached a different conclusion had the July 2008 redundancy policy effected an alteration to the employer's method of calculating an employee's entitlement; or if it had in some way altered the essential character of the existing policy. However, this was not the effect of the July 2008 policy. It was more in the form of advice regarding changes to the law that the employer was passing on to employees.

36. For the above reasons, the Tribunal concludes that the payments made to the Applicant by his employer constituted a transitional termination payment as defined in Division 82 of the Act.

Directed termination payment

37. As the Tribunal has concluded that the payment to the Applicant was a transitional termination payment, the provisions of section 82-10F are enlivened. Pursuant to section 82-10F(2), the employee may choose, within 30 days after a pre-payment statement about a transitional termination payment is given, to direct payment to a superannuation fund. As no pre-payment statement has yet been provided by the employer, it is clear that the Applicant's rights under section 82-10F are extant.

38. For the above reasons, the Tribunal sets aside the decision under review and in substitution decides the Applicant received a transitional termination payment as defined in section 82-10 of the Act.