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Authorisation Number: 1011535547164

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Ruling

Subject: Transitional termination payment

Questions:

Is any part of the termination payment received by you on termination of employment a transitional termination payment as defined in section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA)?

Can any part of the termination payment received by you on termination of employment be rolled over into your superannuation fund as a directed termination payment under section 82-10F of the ITTPA?

Answers:

No

No

This ruling applies for the following period:

Year ended 30 June 2009

The scheme commenced on:

1 July 2008

Relevant facts and circumstances

You are over the preservation age.

You were employed by the employer for a number of years.

You have provided copies of your written employment contracts with the employer in respect of 1994, 1998, 2004 and 2008 in this application.

You entered into a Deed of Release (the Deed) with the employer regarding the termination of your employment.

In the Deed, it stated that:

· your employment will be terminated on a specific date;

· the reason for the termination of your employment is due to your position being redundant; and

· you will be paid a specific genuine redundancy amount based on a specific number of weeks salary being a payment in respect of severance (the payment).

You instructed your employer to rollover the payment into your self managed superannuation fund (SMSF). The benefits were rolled over into your SMSF in the 2008-09 income year.

You signed the Deed and the employer issued a PAYG payment summary - employment termination payment to you in the 2008-09 income year.

Initially, your employer incorrectly treated the payment as a transitional termination payment (TTP), but has since re-examined the payment and decided that it did not comply with the rules for a TTP.

Relevant legislative provisions:

Income tax Assessment Act 1997 Section 82-130

Income tax Assessment Act 1997 Subsection 82-130(1)

Income tax Assessment Act 1997 Subsection 82-130(2)

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 Assessment Act 1997 Section 83-170

Income tax Assessment Act 1997 Section 83-175

Income Tax (Transitional Provisions) Act 1997 Section 82-10

Income Tax (Transitional Provisions) Act 1997 Subsection 82-10(1)

Income Tax (Transitional Provisions) Act 1997 Subsection 82-10(2)

Income Tax (Transitional Provisions) Act 1997 Subsection 82-10(3)

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

Income Tax (Transitional Provisions) Act 1997 Subsection 82-10F(1)

Reasons for decision

Summary

The payment you received from the termination of your employment is not a TTP because it was provided for under a contract, instrument or agreement that came into force on or after 10 May 2006.

Accordingly, the amount in excess of the tax-free limit of the genuine redundancy payment made under the Deed of Release (the Deed), is not a TTP.

The payment in excess of the tax-free of the genuine redundancy payment is a life benefit employment termination payment.

As the termination payment is not a TTP it cannot be rolled over into a complying superannuation fund.

Detailed reasoning

Employment termination payment

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:

(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.

It is not considered necessary to examine in detail if the payment made to you satisfies the above requirements. Based on facts provided the Commissioner accepts the payment is an employment termination payment.

The settlement payment constitutes a life benefit 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).

In particular, subsection 82-130(2) of the ITAA 1997 states:

A life benefit termination payment is an employment termination payment to which subparagraph (1)(a)(i) applies:

Because the settlement payment is an employment termination payment to which subparagraph 82-130(1)(a)(i) of the ITAA 1997 applies, the settlement payment constitutes a LBTP within the meaning of subsection 82-130(2) of the ITAA 1997.

Genuine redundancy payment

A payment made to an employee, after 30 June 2007, is a genuine redundancy payment (GRP) if it satisfies all criteria set out in section 83-175 of the 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 arms 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)).

In the Deed it states that your employment was terminated by the Company as a result of the redundancy of your position.

Accordingly, the Commissioner accepts that the payment is a genuine redundancy payment under section 83 -175 of the ITAA 1997.

Tax-free part of a genuine redundancy payment

Under Section 83-170 of the ITAA 1997 when there is a genuine redundancy, part of the payment may be tax-free. The tax-free amount is calculated by a formula under subsection (3):

Base amount + [Service amount x Years of service]

The amount worked out from the above formula is the tax-free amount of the payment you received and is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997. Any amount in excess of the tax-free amount will be a LBTP.

Subsection 82-10(2) of the ITAA 1997 provides that the taxable component of the LBTP is assessable income. Subsection 82-10(3) of the ITAA 1997 specifies that taxable component is subject to tax, depending on the recipient's age.

Transitional termination payment

A life benefit termination payment made between 1 July 2007 and 30 June 2012 may be a TTP under section 82-10 of the ITTPA.

Subsection 82-10(1) of the ITTPA states that:

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 another 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.

Furthermore, at subsection 82-10(3) of the ITTPA it states:

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.

The issue for consideration is whether the payment made to you satisfies the requirement of being an entitlement under a written contract.

The explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Act 2007 which introduced section 82-10 states:

4.68 In order to ensure that the transitional provisions are not open to abuse, they are only available in situations where the payment was able to be determined as at 9 May 2006. This will encompass arrangements where the contract refers to the amount of the payment by way of a formula which can be objectively determined, or to payments made in kind (eg, shares).

Contract in force before 10 May 2006

Paragraph 82-10(1)(b) of the ITTPA requires that 'the entitlement is provided for under that contract, law, instrument or agreement as in force just before 10 May 2006'. Furthermore, subsection 82-10(3) of the ITTPA provides that the division applies to a payment only to the extent that, the contract 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.

Further to the above, it should be noted that the Commissioner considers a payment made under a contract entered into after 9 May 2006 will not be a transitional termination payment even if the terms under which the payment is made are the same as the terms of a contract in place just before 10 May 2006. It should also be noted that the Commissioner maintains this position regardless of whether the payment is made under a written contract, a law of the Commonwealth, a State, a Territory or another country, an instrument under such a law or a collective agreement within the meaning of the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009.

In this case, you were employed under a written employment contract which was in force prior to 9 May 2006. The copy of the written employment contracts provided by you did not specify the amount of the payment, or a way to work out a specific amount of the payment on termination of your employment.

An email from the employer confirmed that they do not have a global redundancy policy per se, and they have never had one. They stated that when the big layoffs occurred in the 2008-09 income year, the employer worked with a local legal firm to establish the applicable terms and conditions for the termination payments to be made to the affected employees. Therefore, the employer cannot support that they have a policy in place as of May 2006 in Australia.

In addition, under the terms of the Deed, the employer decided to terminate your position by reason of redundancy effective on a specific date.

Both parties agreed that the termination shall occur on the terms set out in the Deed.

This clearly indicates that it is the intention of the parties to the Deed that this Deed was a new contract of employment which terminated and replaced the previous employment agreement.

Therefore, the entitlement to the payment was received as a result of the Deed and not the employment contract. It is the Deed that provides a way to work out the payment actually received. The Deed was entered into after 9 May 2006 therefore the payment is not a transitional termination payment.

Consequently, the amount in excess of the tax- free amount of the genuine redundancy payment made to you under the Deed is not a transitional termination payment as defined in section 82-10 of the ITTPA.

Directed termination payment

A payment is a directed termination payment if an individual chooses within 30 days of receiving a pre payment statement from the payer to direct a TTP or part of it on the individual's behalf to a complying superannuation plan or to purchase a superannuation annuity.

In this case, as determined above, the payment is not a TTP and therefore it cannot be a directed termination payment as required under section 82-10F of the ITTPA.

As the payment you received is not a TTP you cannot rollover the payment into your SMSF as a directed termination payment.

Although the payment cannot be rolled over as a directed termination payment you can still make the payment into your SMSF yourself as a non-concessional contribution.

It is noted that you had rolled over the settlement payment into your SMSF in the 2008-09 income year. The trustee of the SMSF is required to treat the contributions as a non-concessional contributions, not a rollover of benefits.

Tax Treatment of the settlement payment as an LBTP:

An employment termination payment will be comprised of the following components:

· Tax free component - as provided in section 82-140 of the ITAA 1997, this includes an invalidity segment within the meaning of section 82-150 of the ITAA 1997 (if any) and/or a pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997 (if any); and

· Taxable component - the amount remaining after deducting the tax free component calculated in accordance with section 82-140 from the total payment, as prescribed in section 82-145 of the ITAA 1997.

You commenced employment with the employer prior to 1 July 1983. Accordingly, the period of employment to which the settlement payment relates occurred prior to 1 July 1983. Hence, the LBTP will have a pre-July 83 component within the meaning of section 82-155 of the ITAA 1997 and a taxable component.

The tax- free component (i.e. the pre-July 83 component) is not assessable income and is not exempt income. The taxable component is included, in full, as assessable income.

The taxable component is subject to tax, depending on the person's age when the settlement payment is received.

For recipients above preservation age, the taxable component of an employment termination payment is taxed at 0% below the employment termination payments cap of $145,000 for the 2008-09 income year and at the top marginal rate for amounts above the cap.

In your case, you were over preservation age on the last day of the income year in which the payment was made.

Therefore, provided that you did not receive any additional taxable components of employment termination payments which resulted in you exceeding the employment termination payments cap amount of $145,000, a tax offset will apply to ensure that the rate of tax on the taxable component will not exceed 15%, in accordance with paragraph 82-10(3)(b) of the ITAA 1997. Medicare levy of 1.5% is added to the tax rate of 15%.

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