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This edited version will be removed from the Database after 31 December 2023. If you believe the issues detailed in this edited version warrant retention in an alternative form, email publicguidance@ato.gov.au

This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private ruling

Authorisation Number 86099

This ruling is a private ruling for the purposes of Division 359 of Schedule 1 of the

Taxation Administration Act 1953.

What this ruling is about:

Will an amount be assessable to you as an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 if it is put into a superannuation fund by your former employer?

Ruling:

Will an amount be assessable to you as an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 if it is put into a superannuation fund by your former employer?

Answer: Yes, provided it is paid within 12 months of the termination of your employment.

Year(s) of income or period(s) to which this ruling applies:

Year ended 30 June 2008

Year ending 30 June 2009

Commencement date of scheme:

1 July 2007

The scheme that is the subject of the ruling:

1. You are under 55 years of age.

2. You worked for your employer under a written contract. You were employed on a permanent basis subject to a probationary period of six months.

3. In 2007 you made a written request to the employer, to salary sacrifice an amount of any bonus to be paid after the end of the calendar year.

4. Your employment contract states the following in relation to bonuses:

      The employer has a performance related bonus scheme. Any entitlement to a bonus is at the sole discretion of the Company. Any such bonus will be payable at such time as all other bonuses are paid. To be eligible to be considered for a bonus, you must be employed by the Company at the time that bonuses are paid.

5. A representative of the employer has stated in an email:

      a) our employment contracts stipulate that when it comes to company's incentive and retention award plans:

      -any payment is at the absolute discretion of the Company

      -there is no contractual entitlement or legitimate expectation to any incentive and retention award payment in any year

      -employees will not be paid any incentive and retention award payment in any circumstances if their employment with the Company has ceased or if the employee or the Company have given notice of the employment ceasing at the time the incentive and retention award payment is to be made.

6. Your employment was terminated by reason of redundancy before any bonuses were paid.

7. A Deed of Release (the deed) was made between you and the employer. A clause of the deed states:

    The employer will pay to the Employee the amounts set out in Schedule 1 (Payment).

8. Schedule 1 of the deed sets out the following gross payments:

      Ex- Gratia Payment (1)

      Ex- Gratia Payment (2)

      Ex-Gratia in lieu of discretionary award

      In Lieu of Notice period

      Redundancy payment

      Annual Leave

9. The payment in lieu of notice and redundancy were treated as transitional termination payments and directed by you to be paid into a superannuation fund.

10. Further Gross Payments were made to you in the 2007-08 income year on various dates.

11. The payments were treated as employment termination payments apart from the unused leave and an amount which was treated as the tax free amount of a genuine redundancy payment.

12. A redundancy payment was calculated by the employer. This amount included an ex gratia payment in lieu of a discretionary award.

13. You want part of the ex-gratia payment in lieu of a discretionary award to be paid to your superannuation fund as a concessional employer contribution or as a directed termination payment.

14. An amount has been retained by the employer pending the decision of the private ruling in order to pay this amount into a superannuation fund.

Relevant provisions:

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Paragraph 82-130(1)(a).

Income Tax Assessment Act 1997 Paragraph 82-130(1)(b).

Income Tax Assessment Act 1997 Subsection 82-130(2).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Section 82-140.

Income Tax Assessment Act 1997 Section 82-145.

Income Tax Assessment Act 1997 Section 82-150.

Income Tax Assessment Act 1997 Section 82-155.

Income tax (Transitional Provisions) Act 1997 Section 82-10.

Income tax (Transitional Provisions) Act 1997 Section 82-10F.

Income Tax Assessment Act 1997 Section 80-20.

Explanation: (This does not form part of the notice of private ruling)

A payment made to an employee on or after 1 July 2007 is an employment termination payment if the payment satisfies all the requirements in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997), and is not specifically excluded under section 82-135 of the ITAA 1997.

Subsection 82-130(1) of the ITAA 1997 states:

82-130(1) A payment is an employment termination payment if:

    (a) it is received by you:

      (i) in consequence of the termination of your employment; or

      (ii) after another person's death, in consequence of the termination of the other person's employment; and

    (b) it is received no later than 12 months after the termination (but see subsection (4)); and

    (c) it is not a payment mentioned in section 82-135.

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the words have been interpreted by the courts in several cases. The Commissioner has also issued Taxation Ruling TR 2003/13 (TR 2003/13) which discusses the meaning of the phrase.

The Commissioner in TR 2003/13 considered the phrase 'in consequence of' as interpreted by the Courts.

Paragraph 5 of TR 2003/13 states:

…the Commissioner considers that a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In the present case, there was a dispute between yourself and the employer. The parties agreed to settle the dispute by entering into a Deed of Release (the deed) under which a redundancy payment was calculated by the employer. This amount includes an ex gratia payment in lieu of discretionary award of which an amount has been retained by the employer pending the outcome of this ruling.

All of the payments under the deed have been treated as being in consequence of the termination of your employment including the rest of the ex-gratia payment in lieu of discretionary award.

We agree that this is the correct position to take based on the Commissioner's view in TR 2003/13 and decided court cases. Accordingly, it is not intended to provide a detailed explanation for forming this opinion.

There is no reason to treat that part of the payment in lieu of discretionary award as not being paid in consequence of the termination of employment and accordingly it is an employment termination payment.

Subsections 82-130(1) and 82-130(2) of the ITAA 1997, provide that where an employment termination payment is made during the life of a taxpayer, the payment is known as a life benefit termination payment (LBTP). The payment must be received no later than 12 months after the termination of employment.

The issue is whether the amount can be put into a superannuation fund either as a salary sacrificed employer contribution or as a directed termination payment.

The Commissioner's guidelines regarding effective salary sacrifice arrangements are set out in Taxation Ruling TR 2001/10. This ruling is applicable to amounts that would otherwise be received in the future as salary, wages, bonuses etc. This ruling does not apply to employment termination payments.

In 2007 you had requested your employer to direct a particular amount of any bonus payment that you would receive in respect of the 2007 calendar year into your nominated superannuation fund. Therefore you did make the election to sacrifice your bonus payment before it would have been earned.

However, based on your employment contract and the email from the employer's representative, you were not entitled to the bonus payment you wished to salary sacrifice. This is because you had to be employed when bonus or incentive or retention award payments are made and your employment had been terminated by then. However, you are entitled to an employment termination payment.

Section 80-20 of the ITAA 1997 provides that an employment termination payment is treated as being received by a person if it is made for their benefit or to another person or entity at their direction or request.

Accordingly, if the employment termination payment is paid into a superannuation fund it will still be taken to have been received by you, it cannot be treated as a salary sacrificed employer contribution.

The remaining issue is whether the payment can be put into a superannuation fund under the transitional provisions in the Income Tax (Transitional Provisions) Act 1997 (ITTPA).

In order to be able to be directed to a superannuation fund under the transitional provisions the payment must first be a transitional termination payment (TTP).

Under section 82-10 of the ITTPA a payment is a TTP if it is a LBTP received between 1 July 2007 and 30 June 2012 because the person had an entitlement to it under a written contract that was in force before 10 May 2006.

The contract must also specify the amount of payment or a way to work out the amount of the payment.

In this case, you were employed under a written contract which was in force prior to 10 May 2006.

However, the payment was received as a result of the deed and not the employment contract. It is the deed that provides the entitlement to the payment and a way to work out the amount of the payment actually received.

Therefore the payment is not a TTP. As the payment is not a TTP it cannot be a directed termination payment under section 82-10F of the ITTPA.