Edited version of private ruling

Authorisation Number: 1011587086641

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Ruling

Subject: Transitional Termination Payment

Question 1

Is the employment termination payment a transitional termination payment under section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA)?

Advice/Answers

No

Question 2

Is your client able to direct their company to use all or part of their termination payment made under the policy to a complying superannuation fund?

Advice/Answers

No

Question 3

Can the company apply concessional tax rates that are applicable to Life Benefit Termination Payment to your client's payment?

Advice/Answers

Yes

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

Your client commenced employment with Company A. Your client was initially engaged pursuant to a Letter of Offer.

Your client's employment was transferred to Company B, an associated company within the group.

Your client commenced employment with Company B.

In a variation of letter of contract your client confirmed the agreement to transfer their employment from Company A to Company B.

Due to a company restructure your client's role was made redundant.

Your client will be paid a life benefit termination payment and an amount representing the tax free part of a genuine redundancy payment.

Your client is over 55 years of age.

Relevant legislative provisions

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).

Reasons for decision

Summary of decision

The payments are not transitional termination payments as they were not paid in relation to a contract which was in force before 10 May 2006. As the payments are not transitional termination payments they are not directed termination payments, and can not be rolled over to a complying superannuation fund. The company can apply concessional tax rates to the taxable component of the life benefit termination payment but not the rates for transitional termination payments.

Detailed reasoning

Transitional termination payment

A life benefit termination benefit (LBTP) made between 1 July 2007 and 30 Jun 2012 may be a transitional termination payment under section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (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 first issue for consideration is whether the LBTP 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 (e.g., 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.

This condition is satisfied as the payment was received by your client because he is entitled to the payment under a written contract.

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.

This is because the employer does not work out the specific amount of the payment as provided for by the agreement as in force just before 10 May 2006. The employer makes the payment in accordance with the new agreement.

In this case, your client commenced employment with Company A. Your client was initially engaged pursuant to a letter of offer. Your client's employment was subsequently transferred to Company B after 9 May 2006. In a variation of letter of contract your client confirmed the agreement to transfer their employment from Company A to Company B. The variation was made in order to update the employer and confirm your company service as being continuous from the date you originally commenced with Company A. All other terms and conditions of employment as outlined in your original letter of contract were to remain the same.

It is considered that, in this instance, your client entered a new contract of employment with Company B after 9 May 2006. Although the terms and conditions under your client's former contract of employment were carried over to their employment with Company B, the fact still remains that, because the contracting parties changed, a new contract of employment was entered into. As the contract came in force after 9 May 2006, the payment made to your client as a result of their role being made redundant is not being made under an agreement that was in place just before 10 May 2006.

The payment made in accordance with Company B policy does not satisfy the requirements of being an entitlement in force under a written contract prior to 10 May 2006. Accordingly, the payment is not a transitional termination payment.

Directed termination payments

Section 82-10F of the IT(TP)A states:

(1) A transitional termination payment (or part of such a payment) is a directed termination payment if:

(a) the individual chooses, in accordance with this section, to direct the payment (or part of the payment) to be made; and

(b) the payment (or part of the payment) is made on the individuals behalf as directed.

Choice to make a payment

(2) An individual may choose, within 30 days after a pre-payment statement about a transitional termination payment is given to the individual under section 82-10E, to direct the payer to use all or part of the payment to make a payment on behalf of the individual:

(a) to a complying plan; or

(b) to purchase a superannuation annuity.

(3) To make a choice, the individual must:

(a) make it in an approved form; and

(b) give the completed form to the payer.

(4) The payer must, immediately after receiving a completed form under subsection (3):

(a) give the entity (or entities) to which the payment is directed written notice of the amount that is to be paid, and of the tax free component of the amount; and

(b) comply with the direction (or directions) in the form.

Personal contributions and roll-over amounts included in assessable income of an entity are set out in the table under subsection 295-190(1) of the Income Tax Assessment Act 1997. Item 3 of the table shows the taxable component of a directed termination payment (within the meaning of section 82-10F of the IT(TP)A) is assessable income of a complying superannuation fund, a complying approved deposit fund and a retirement savings account provider.

Your client's LBTP is not a transitional termination payment under section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA), and therefore cannot be a directed termination payment under section 82-10F of the IT(TP)A. Employment termination payments made after 1 July 2007 cannot be rolled over into a complying superannuation fund.

Life benefit employment termination payments

All employment termination payments qualify for concessional tax rate treatments, while further concessional treatment applies to transitional termination payments. As your client's employment termination payment is not a transitional termination payment it will comprise the following components:

Tax fee component this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and

Taxable component the amount remaining after deducting the tax free component from the total payment.

The taxable component is subject to tax, depending on a person's age, as follows:

Taxpayer's age	Tax on taxable component for 2010-11
Preservation age* or over on the last day of the income year in which the payment is made.	Up to $160,000 - taxed at a maximum rate of 15% plus Medicare levy.
	Amount over $160,000 - taxed at top marginal tax rate of 45% plus Medicare levy.

* Preservation age is the age at which retirees can access their super benefits generally on retirement.

If your client was born:

· before 1 July 1960, you can access your super when you are 55.

· after 30 June 1960, your preservation age will be between 55 and 60.

In this case, your client has reached preservation age.

The taxable components of all employment termination payments received in an income year are counted towards this cap. Any tax-free amounts are not counted towards the cap.

As the period of service attributable to the payment commenced after 30 June 1983 the whole payment consists of a taxable component. Thus the LBTP should be included as assessable income in your client's income tax return for the 2010-11 income year. The first $160,000 is taxed at 15% plus Medicare levy and the remaining amount of any payments in excess of the cap are taxed at the top marginal rate of 45% plus the Medicare levy.

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