Edited version of private ruling

Authorisation Number: 1011566201646

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Ruling

Subject: Transitional termination payments

Question:

Will the proposed employment termination payments qualify as transitional termination payments?

Answer:

Yes

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

The Company has a Workplace Agreement (the Agreement) under the Workplace Relations Act 1996 which was in force prior to 10 May 2006.

The Agreement contains a clause that provides for payments to be made in the event of the redundancy of positions covered by the Agreement. The Agreement provides the basis for calculating the redundancy payment.

The Company lodged an application to extend and vary the existing Agreement with the Australian Industrial Relations Commission (the Commission) after 9 May 2006.

Pursuant to the Workplace Relations Act 1996, the Commission ordered that the nominal expiry of the Agreement be extended and also approved the variation of some clauses from the original Agreement.

The variations do not alter the formula in the Agreement for the calculation of the redundancy entitlements. In fact, the redundancy provision under the Agreement has not been changed.

The Company is currently undertaking a progressive closure of its manufacturing plant.

It is expected that redundancy payments will be made to employees in the 2010-11 income year.

Relevant legislative provisions:

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

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

Income Tax Assessment Act 1997 Paragraph 82-135(e).

Income Tax Assessment Act 1997 Subsection 83-170(3).

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 Subsection 82-10(4).

Income Tax (Transitional Provisions) Act 1997 Subsection 82-10(5).

Income Tax (Transitional Provisions) Act 1997 Subsection 82-10(6).

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

Reasons for decision

Summary

The proposed employment termination payments, to be made to employees of the Company, are transitional termination payments as they were provided for under a contract, instrument or agreement that came into force prior to 10 May 2006.

Detailed reasoning

Transitional termination payment

An employment termination payment made after 1 July 2007 can no longer be rolled over into a complying superannuation fund, unless the payment constitutes a transitional termination payment under section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A).

Subsections 82-130(1) and 82-130(2) of the Income Tax Assessment Act 1997 (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).

It should be noted that, in accordance with paragraph 82-135(e) of the ITAA 1997, where a person receives a tax-free genuine redundancy payment, or early retirement scheme payment, the tax--free amount is not an employment termination payment and consequently can not be a LBTP.

A LBTP paid between 1 July 2007 and 30 June 2012 may be a transitional termination payment under section 82-10 of the of the IT(TP)A which states:

(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 another country, an instrument under such a law, a collective agreement within the meaning of the Workplace Relations Act 1996 or an AWA within the meaning of Schedule 7A to that Act; and

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

(2) However, this Division does not apply in relation to a life benefit termination payment received by you on or after 1 July 2012 (except to the extent provided by Subdivision 82-E).

(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.

(5) To the extent that this Division applies to a life benefit termination payment, Subdivision 82-A of the Income Tax Assessment Act 1997 does not apply to the payment (subject to Subdivision 82-E of this Act).

(6) In this Division:

transitional termination payment means:

(a) a life benefit termination payment to which this Division applies; or

(b) if this Division applies to only part of a life benefit termination payment - that part of the payment.

The Commissioner considers that employment termination payments made under a contract, instrument or agreement that came into force prior to 10 May 2006 are transitional termination payments. Where a variation is made to such an agreement after 10 May 2006, a payment made under that agreement may still be considered a transitional termination payment provided that the variation did not impact on the formula for calculating an employee's entitlements on termination of employment.

In this case, the Company has a Workplace Agreement (the Agreement) under the Workplace Relations Act 1996.

The Agreement, which was certified by the Australian Industrial Relations Commission (the Commission) and was in force prior to 10 May 2006. The Agreement contains a clause that provides for payments to be made in the event of redundancy of positions covered by the Agreement. The Agreement provides the basis for calculating the redundancy payment.

Whilst the Agreement does not specify the amount of the payment, it does provide a way to work out a specific amount of the payment (subsections 82-10(3) and (4) of the IT(TP)A.

The Company lodged an application for, and the Commission made, an order to extend and vary the certified Agreement after 9 May 2006.

The Agreement refers to a method of calculating employees' entitlements, which can be objectively determined. The variation made to the Agreement did not alter this formula for calculating employees' entitlements on termination of employment.

Furthermore, these variations did not result in a new agreement being entered into. Evidencing this is the fact that after the variations were enacted, the date of effect of the Agreement remained unchanged. In other words, it is clear that all parties to the agreement considered that the original Agreement was still in force and had not been replaced.

Therefore, the requirements under section 82-10 of the IT(TP)A have been satisfied in respect of payments to be made to employees of the Company in the 2010-11 income year.

Conclusion

The amount of the proposed genuine redundancy payment in excess of the tax-free amount determined under subsection 83-170(3) of the ITAA 1997 will be a transitional termination payment under section 82-10 of the IT(TP)A. As a result, employees are able to make a choice to direct any payment in excess of their tax-free amount be paid into a complying superannuation fund, or used to purchase a superannuation annuity before the payment is made.

The taxable component of any transitional employment termination payment not rolled over is subject to tax, depending on the person's age, as follows:

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