ATO Interpretative Decision

ATO ID 2007/212

Superannuation

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is an amount in excess of the tax free amount of a genuine redundancy payment a transitional termination payment, where the payment is made under an agreement that was in force just before 10 May 2006 and the payment is made before 1 July 2012?

Decision

Yes, an amount in excess of the tax free amount of a genuine redundancy payment is a transitional termination payment, where the payment is made under an agreement that was in force just before 10 May 2006 and the payment is made before 1 July 2012.

Facts

An employee receives a genuine redundancy payment before 1 July 2012, of which part is in excess of the tax free amount.

The payment is received within 12 months of the termination.

Entitlement to the payment arises under an Enterprise Agreement (agreement) that was in force just before 10 May 2006.

The agreement specifies the amount of the payment to be made in the event of a person's redundancy.

Reasons for Decision

Section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) provides that a life benefit termination payment received on or after 1 July 2007 is a transitional termination payment in the following circumstances:

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the payment is received by a person because the person is entitled to it under a written contract, a law of the Commonwealth, a State, a Territory or another country, an instrument under such a law or a workplace agreement within the meaning of the Workplace Relations Act 1996;

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the entitlement is provided for under that contract, law, instrument or agreement as in force just before 10 May 2006;

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the payment is received before 1 July 2012; and

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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.

The term 'life benefit termination payment' is defined in subsection 82-130(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to mean an employment termination payment that is received in consequence of the termination of your employment and:

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is received no later than 12 months after the termination; and

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is not a payment mentioned in section 82-135 of the ITAA 1997.

Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. Paragraph 82-135(e) of the ITAA 1997 provides that the part of a genuine redundancy payment worked out under section 83-170 of the ITAA 1997 is not an employment termination payment.

Section 83-170 of the ITAA 1997 prescribes the methodology to be applied to determine the tax free amount of a genuine redundancy payment. In this case, the total amount of the payment exceeds the tax free amount of the genuine redundancy payment. Consequently, paragraph 82-135(e) of the ITAA 1997 does not apply to the amount of a genuine redundancy payment that exceeds the tax free amount and is a life benefit termination payment where the remaining requirements of subsection 82-130(2) of the ITAA 1997 are met.

As the amount in excess of the tax free amount of a genuine redundancy payment was made in consequence of the termination of the employee's employment, was received within 12 months of the termination and is not, but for the application of section 83-170 of the ITAA 1997, a payment to which section 82-135 of the ITAA 1997 applies, it is a life benefit termination payment for the purposes of section 82-130 of the ITAA 1997.

However, the payment also meets all of the requirements under section 83-175 of the ITAA 1997 and, hence, the payment also qualifies as a genuine redundancy payment.

In this case, the total amount of the payment exceeds the tax free amount of the genuine redundancy payment. Consequently, as paragraph 82-135(e) of the ITAA 1997 does not apply to the amount of a genuine redundancy payment that exceeds the tax free amount and, as the original payment is characterised as a life benefit termination payment, the excess amount is considered to be the remaining amount of that original life benefit termination payment.

As the original life benefit termination payment meets all of the relevant requirements of section 82-10 of the ITTPA 1997, including that the original payment amount was specified in the agreement, the remaining amount of the original termination payment qualifies as a transitional termination payment.

Year of income:  Year ended 30 June 2008 Year ended 30 June 2009 Year ended 30 June 2010 Year ended 30 June 2011 Year ended 30 June 2012

Legislative References:
Income Tax Assessment Act 1997
   section 82-130
   paragraph 82-135(e)
   section 83-170
   section 83-175

Keywords
Bona fide redundancy payments
Employment & industrial relations
Employment termination
Income
Redundancy & retrenchment

Business Line:  Superannuation

Date of publication:  23 November 2007
Date reviewed:  27 November 2014

ISSN: 1445-2782