Edited version of private ruling

Authorisation Number: 1011571356410

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Ruling

Subject: Transitional termination payment

Questions and answers:

1. Does the payment to be made to the employee under the Redundancy Policy dated post May 2006, meet the requirements under Division 82 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) in order to be a transitional termination payment (TTP)?

No

2. Is any part of the above payment made to the employee under the Redundancy Policy dated post May 2006, a TTP under Division 82 of the ITTPA 1997?

No

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts:

The employee commenced employment with the Company (your client) more than ten years ago.

During employment the employee and your client were parties to a written contract of employment (the contract).

The contract states that the contract, together with its annexures and the Company's code of conduct, any policies on the Company's intranet and procedures relating to employment matters constitute the entire contract between an employee and the Company, in substitution of all agreements whether oral or written, express or implied.

Further, the contract states that the Company reserves the right to amend its policies and procedures as necessary.

The Redundancy Policy that was in effect immediately prior to 10 May 2006 (the Original Policy), states that a retrenched employee received various payments, in addition to statutory entitlements such as unused leave:

The Original Policy was replaced after May 2006 (the post May 2006 Policy). Under this policy, which was in effect when the employee's position was made redundant, a retrenched employee will receive various payments, in addition to statutory entitlements such as unused leave and leave loading:

However under the post May 2006 Policy, an employee's entitlements were reduced compared to the Original Policy.

In the 2009-10 income year the employee's employment with your client terminated on account of genuine redundancy.

Within 12 months of termination of the employee's employment your client intends to pay their entitlements calculated in accordance with the post May 2006 Policy.

The employee has completed a number of full years of service with your client and the tax-free part of the employee's genuine redundancy payment has been calculated.

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 82-135.

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 Subsection 82-10(4)

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

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

Reasons for decision

Summary

The payment made to the employee on termination of their employment will not be a transitional termination payment (TTP) because it is provided for under a contract, instrument or agreement that came into force after 10 May 2006.

As the payment is not a TTP, no amount of the payment is treated as a TTP.

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:

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.

Based on the information provided, the proposed payment will be an employment termination payment under section 82-130 of the ITAA 1997.

However, section 82-135 of the ITAA 1997 excludes payments such as pensions, foreign termination payments, unused annual leave and unused long service leave and the tax-free part of genuine redundancy payments or early retirement scheme payments from being an employment termination payment.

In accordance with the post May 2006 Policy, the payment due to the employee will include their statutory entitlements such as unused leave.

You have also stated that the termination of employment of the employee is on account of genuine redundancy. This being the case, the tax-free part of the employee's genuine redundancy payment is excluded from being an employment termination payment under section 82-135 of the ITAA 1997.

Therefore, the proposed payment, less the genuine redundancy payment and any amount for unused annual or long service leave entitlements, is an employment termination payment.

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.

The proposed employment termination payment is a life benefit termination payment as defined under subsection 82-130(2) of the ITAA 1997.

Transitional termination payment

Employment termination payments cannot be rolled over into a complying superannuation fund, unless the payment qualifies as a transitional termination payment (TTP) under section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA). This section relates to entitlements that existed before 10 May 2006 and states:

(1) 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

· 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 of the ITTPA).

(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:

· by a method or formula for working out the amount;

· 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.

Example:

For paragraph (b), a specific amount of a life benefit termination payment that you receive on 1 July 2007 can be worked out from the terms of your written contract if the contract provided (just before 10 May 2006) for you to choose between payment in the form of a cash amount of $100,000 or the transfer to you of 10,000 shares in a specified company.

(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 (ITTPA)).

(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 first issue for consideration is whether a payment made in accordance with the company policy satisfies the requirement of being an entitlement under a written contract.

Entitlement under a written contract

The explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Act 2007 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 (eg, shares). [Schedule 2, item 2, subsections 82 - 10(3) and (4)]

An amount paid in accordance with a company policy will only satisfy the requirement of being an entitlement under a written contract where the policy is either incorporated by reference or is an implied term of the employee's contract.

In this case, the employee was employed with your client (the Company) upon signing their acceptance in response to a letter of offer.

The policies of the Company were incorporated in the employee's contract of employment by virtue of being published on the Company's intranet, as stated in the letter of offer.

You have provided information regarding two Retrenchment and Redundancy policies, the Original Policy effective immediately prior to 10 May 2006 and the post May 2006 Policy, which applies to payments made in the 2010-11 income year.

The post May 2006 Policy provides for the employee's entitlements in the event the employee is retrenched. The post May 2006 Policy refers to the Retrenchment Payment which would be used to calculate the employee's total severance pay entitlement in the event the employee is retrenched.

The Original Policy, also details an employee's redundancy entitlements. These entitlements are very similar to those in the post May 2006 Policy with the exception of an additional entitlement based on the employee's salary.

The employee's employment terminated in the recent income year and therefore the employee is entitled to payments in accordance with the post May 2006 Policy.

The Commissioner accepts that where an employee does have a contractual entitlement to a payment on termination of employment and that the employee's entitlement can be evidenced in more than one document, including such documents as an employer's redundancy policy, it will satisfy the requirement in paragraph 82-10(1)(a) of the ITTPA. This requirement is that the payment is received by a taxpayer because they have an entitlement to the payment under a written contract.

The post May 2006 Policy is a written contract and provides a method of calculating what the employee would be entitled to receive upon retrenchment.

Therefore the requirement of Paragraph 82-10(1)(a) of the ITTPA has been satisfied.

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 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 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 explained above, an amount paid in accordance with a company policy will only satisfy the requirement of being an entitlement under a written contract where the policy is either incorporated by reference or is an implied term of the employee's contract.

Accordingly, where the formula to determine the amount of the payment in a company policy is changed this is in effect a change to the terms of the employee's contract.

Each case is determined on the merits of its own facts. Depending on the nature and extent of the changes made this may either be considered as a variation to the existing contract or alternatively as the rescission of the existing contract and the entering into of a new contract.

The Commissioner considers that if either of the following occurs after 9 May 2006, the payment is not a TTP:

The method of working out the employee's entitlements has changed (regardless of whether the change results in an increase or decrease in employee entitlements); or

The payment is made under a new agreement.

In this case, the Company replaced the Original Policy after 9 May 2006. The current version (the post May 2006 Policy) changed employees' entitlements to severance payments under the Original Policy, which was in place just before 10 May 2006.

As such, the Original Policy does not provide for the calculation of the severance payment the employee actually received. Under the Original Policy the employee would have been entitled to a larger payment.

On the basis of the facts provided, the redundancy payment the employee is entitled to receive will be made under the Company's current redundancy guidelines in the post May 2006 Policy, which came into force after 9 May 2006. It will not be made under the guidelines that were in place just before 10 May 2006.

This is because the Original Policy was replaced by the post May 2006 Policy and clearly the payment will be made under the post May 2006 Policy.

Consequently, the requirement in paragraph 82-10(1)(b) of the ITTPA is not satisfied. The employment termination payment the employee will receive from the Company is, therefore, not a TTP under section 82-10 of the ITTPA.

As the payment is not a TTP, no amount of the payment is treated as a TTP.

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