Edited version of private ruling

Authorisation Number: 1011560876285

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Ruling

Subject: Transitional termination payment

1. Is the payment (the payment) made to your client an employment termination payment for the purposes of section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

2. Is the payment made to your client a transitional termination payment under section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997)?

No.

This ruling applies for the following period:

Year ending 30 June 2009

The scheme commenced on:

1 July 2008

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Your client, who is over 55 years of age, commenced employment with the Employer in the 2004-05 income year in a permanent full time capacity.

Your client also held directorships associated with the Employer.

A copy of your client's Employment Agreement (the Agreement), which was made in the 2004-05 income year, has been provided.

The Agreement included details relating to your client's roles, conditions of employment, remuneration and clauses pertaining to amounts payable to your client upon termination of employment.

Subsequent to the Agreement being made the Employer provided your client, in later income years, letters which basically provided updates on your client's remuneration package.

Copies of Reports (the Reports), up to and including the 2007-08 income year, have been provided which show the amounts payable to your client upon termination of employment remained the same as when the Agreement was made in the 2004-05 income year.

In the 2008-09 income year a Deed of Release (the Deed), along with another deed, was signed by your client.

In the Deed it was stated amongst other matters that:

· your client would, on a specified date in the 2008-09 income year, cease employment and relinquish the directorships held with the entities associated with the Employer

· subsequent to terminating the offices, your client would perform work for the Employer for a specified term on an ad hoc basis. The roles, responsibilities and remuneration associated with this work was substantially different to your client's previous positions

· your client would receive a termination payment, the quantum being the same as that in the relevant termination clause in the Agreement

· the payments received by your client were provided for in the Deed, and

· the Deed, and the other deed, constitute the entire agreement between the Employer and your client (the parties) and they supersede any prior understanding or agreement between the parties and any prior condition, warranty, indemnity or representation imposed, given or made by a party.

In the 2008-09 income year your client resigned from the positions with the Employer and subsequently was paid a termination payment (the payment), the tax treatment of which is reflected in a 'PAYG payment summary - employment termination payment' for the 2008-09 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 82-10(2).

Income Tax Assessment Act 1997 Subsection 82-10(3).

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 82-135.

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(3).

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

Summary

The employment termination payment made to your client is not a transitional termination payment because it was not made in relation to a contract, instrument or agreement that came into force on or before 10 May 2006.

Detailed reasoning

Employment termination payments made on or after 1 July 2007

From 1 July 2007, the taxation treatment of payments made in consequence of the termination of any employment of the taxpayer has changed. These payments were formerly known as eligible termination payments (ETPs).

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

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 that termination (but see subsection (4)); and

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

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

· payment for unused annual leave or unused long service leave

· the tax-free part of a genuine redundancy payment or an early retirement scheme payment

· reasonable capital payments for personal injury.

To determine if the termination payment (the payment) that was paid to your client constitutes an employment termination payment, all the conditions in section 82-130 of the ITAA 1997 must be satisfied.

Failure to satisfy any of the conditions will result in the payment not being considered an employment termination payment.

The first condition requires that the payment is received by the employee in consequence of the termination of their employment.

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.

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.

In your client's case, the termination of your client's position with the Employer in the 2008-09 income year, and subsequent work with the Employer in a different capacity, does not alter the payment being made in consequence of a termination of employment.

In AAT Case 39/97 97 ATC 407; Case 12,178 (1997) 37 ATR 1174 it is noted a particular payment received by a taxpayer was considered an eligible termination payment where he resigned from his office as a branch manager and, with no time gap involved, entered into a new contract in a different role as a division director with the same employer.

In your client's case, the Commissioner accepts the payment received by your client is due to your client's termination of employment as shown in the relevant clause of your client's employment agreement (the Agreement) and Reports which reiterated your client's entitlement to a termination payment upon termination of employment. Therefore, it is evident that the payment made to your client is in consequence of the termination of employment and would not have been made if there was no termination of employment.

For this reason the requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

Payment received no later than 12 months after termination

In addition to meeting the other conditions for a payment to be an employment termination payment, paragraph 82-130(1)(b) of the ITAA 1997 specifies that the payment must be received within 12 months of the employee's termination of employment, unless they are covered by a determination exempting them from the '12 month rule'.

As shown in the facts, your client's employment was terminated in the 2008-09 income year and the payment was made in the same income year.

Accordingly, as the payment was made within 12 months of the termination of your client's employment, the requirement in paragraph 82-130(1)(b) of the ITAA 1997 has been satisfied.

A payment mentioned in section 82-135 of the ITAA 1997

As previously mentioned, section 82-135 of the ITAA 1997 excludes certain payments from being employment termination payments. These payments include:

· a payment for unused annual leave

· a payment for unused long service leave

· capital payments for personal injury.

In your client's case, the facts provided show that the payment did not include any of the payments mentioned in section 82-135 of the ITAA 1997 which would preclude any part of the payment from being an employment termination payment.

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

The 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:

In your client's case the payment is an employment termination payment to which subparagraph 82-130(1)(a)(i) of the ITAA 1997 applies and accordingly it constitutes a LBTP within the meaning of subsection 82-130(2) of the ITAA 1997.

Transitional termination payment

A life benefit termination payment made between 1 July 2007 and 30 June 2012 may be a transitional termination payment 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:

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.

As the payment made to your client is a life benefit termination payment (LBTP) the next issue for consideration is whether the payment satisfies the requirement of being an entitlement under a written contract.

The explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Act 2007 (the EM) which introduced section 82-10 of the ITTPA 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 (e.g., shares). [Schedule 2, item 2, subsections 82 - 10(3 ) and ( 4 )] (emphasis added)

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, your client was employed under a written employment contract which, made in the 2004-05 income year, was in force prior to 9 May 2006. Further, the copy of the written employment contract provided by you, as do the Reports, specify the amount your client would receive on termination of employment.

Though the amount and conditions relating to your client's entitlement to a termination payment were stated in the above mentioned documents, it must also be demonstrated that the payment was made under a contract which was in force prior to 9 May 2006.

In your client's case however a Deed of Release (the Deed) and another accompanying deed were signed in the 2008-09 income year by your client and the Employer. In the Deed your client acknowledged in the Deed that:

· the payments made provided for in the Deed, and

· the Deed, and the other deed, constitute the entire agreement between the Employer and your client (the parties) and they supersede any prior understanding or agreement between the parties and any prior condition, warranty, indemnity or representation imposed, given or made by a party.

In view of the above it is considered that the payment received by your client was not made in relation to 'a contract, law, instrument or agreement as in force just before 10 May 2006' but provided for in the Deed which supersedes any prior understanding or agreement.

Accordingly, the payment is not considered to be a transitional termination payment for the purposes of section 82-10 of the ITTPA.

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