Edited version of private ruling

Authorisation Number: 1011753926463

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Ruling

Subject: transitional termination payment

Issue 1

Question 1

Will the proposed employment termination payment to be paid to you in the 2011-12 income year meet the requirements to be a transitional termination payment?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commences on:

1 July 2011.

Issue 2

Question 1

Can the proposed contribution to a superannuation fund in the 2011-12 income year be treated as a directed termination payment?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts:

You commenced employment approximately 30 years ago.

You plan to take early retirement during the 2011-12 income year..

On retirement, you will be entitled to an Early Retirement Benefit (ERB).

The ERB will be paid before 30 June 2012.

Your preference is to roll this ERB payment into a superannuation annuity/allocated pension.

You state:

The ERB has existed in the same form since you joined your employer.

You employment is covered by both an Award and a certified agreement (Agreement).

The Award is a 'safety net' document which sets out basic minimum terms and conditions.

The current Award was current as at 9 May 2006.

The additional Agreements are the result of enterprise bargaining for conditions above the minimums set out in the Award and renegotiated every three years.

The ERB is described in the Award and continued payment of the ERB has been confirmed in the Agreements, sometimes by referring to the continued application of a clause in the Award and sometimes by re-stating the relevant clause in full.

The Award and Agreements are available in full on the Fair Work Australia web site.

The ERB is described in the relevant Award and includes the formula used to calculate the amount of the ERB.

The Letter of Agreement (LOA) attached to relevant Agreement provides confirmation of your employer continuing commitment to the application of the relevant clause of the Award regarding the ERB and is restated in the relevant clause of the current Certified Agreement 2009-2012.

You have provided the following supporting documents:

Your employer's Early Retirement Benefit (ERB): Procedure.

· ATO Publication Employment termination payments - transitional arrangements -

· The relevant Award which covers your employment.

· The relevant Certified Agreement for the 2009-12 year and prior year certified agreements.

Your employer treats this ERB payment as "not eligible as a Transitional Termination Payment"(as per the ERB: Procedure documentation).

You provided an email communication of in 2011 to explain the reason why you have a different opinion to your employer to treat your ERB as a transitional termination payment.

You stated that you view the ERB is not being paid under the terms of either the current or previous certified agreements. Instead, you view the ERB is paid under the terms of the relevant Award that you are employed under which has existed unchanged since 2000 and is still applicable to your employment. Therefore, the transitional provisions would apply until 30 June 2012.

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)

Issue 1

Question 1

Will the proposed employment termination payment to be paid to you in the 2011-12 income year meet the requirements to be a transitional termination payment?

Summary

The proposed employment termination payment (the ERB) to be paid to you in the 2011-12 income year will not meet the legislative requirements to be a transitional termination payment.

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.

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

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.

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.

Based on the information provided, it is evident the proposed ERB payment will be paid in consequence of the termination of your employment under the a certified agreement applicable for the period 2009-2012 (Agreement 2009-2012). Thus, subparagraph 82-130(1)(a)(i) of the ITAA 1997 will be satisfied.

As your employment will be terminated during the 2011-12 income year and the payment will be received by you before 30 June 2012, the 12 month requirement under paragraph 82-130(1)(b) of the ITAA 1997 will also be satisfied.

Section 82-135 of the ITAA 1997 specifically excludes certain payments from being an employment termination payment (ETP) such as the tax-free part of a genuine redundancy payment or lump sum payments for unused annual leave and unused long service leave on termination of employment. Based on the information provided in your case, the total ERB will be an ETP and not an amount specifically excluded under section 82-135 of the ITAA 1997.

Accordingly, the whole amount of the ERB will be treated as an ETP under subsection 82-130(1) of the ITAA 1997.

Transitional termination payment

Some employment termination payments made between 1 July 2007 and 30 June 2012 are subject to transitional arrangements. Payments made under these arrangements (transitional termination payments) attract tax concessions designed to broadly mirror arrangements prior to 1 July 2007, including the ability to direct these amounts into superannuation.

To qualify as a transitional termination payment, the payment must be a life benefit termination payment (as defined in subsection 82-130(2) of the ITAA 1997) that meets the requirements of section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA).

Section 82-10 of the ITTPA 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 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.

(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.

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).

(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.

On the basis of the information as provided, it can be established (and as stated by your employer in the relevant Early Retirement Benefit: Procedure that the ERB entitlement will be paid under the certified agreement that is relevant for 2009-2012 (Agreement 2009-2012).

As discussed previously, in order to be a transitional termination payment, the ERB entitlement needs to satisfy the requirements of subsection 82-10(1) of the ITTPA. Therefore the first issue for consideration is whether the proposed ERB entitlement if made to you under the relevant certified agreement for 2009-2012 satisfies the requirement of being an entitlement under a written contract or 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.

Entitlement under a written contract

The explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 which introduced section 82-10 of the ITTPA states:

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)]

(emphasis added)

It can be ascertained from the information as provided that under your employment is covered by both an Award and a Certified Agreement. As stated by you, the Award is a 'safety net' document which sets out basic minimum terms and conditions; and the present Award has been current since the year 2000.

The additional Agreement is the result of enterprise bargaining for conditions above the minimums set out in the Award. The Agreement is renegotiated every three years.

The ERB is described in the your relevant employment Award and includes the formula that is used to calculate the ERB entitlement. This Award was current as at 9 May 2006.

The continuance of the ERB entitlement referred to in the Award has been confirmed in the in both the previous and current certified agreements; and confirms your ERB entitlement under your Award.

That is, the ERB entitlement will be paid to you under your current Agreement 2009-2012.

Your employer has also stated that entitlement to the ERB will be made under the Agreement 2009-2012. Therefore, as you would not have been covered by the Agreement 2009-2012 as at 9 May 2006, it is the case that the ERB would not have been able to be determined as at 9 May 2006. This means the requirements of subsections 82-10(3) and 82-10(4) of the ITTPA would also not be satisfied as the ERB would not be an entitlement provided for under a collective agreement that was in force just before 10 May 2006.

Whilst it can be seen the Award provided an entitlement to the ERB which was able to be determined as at 9 May 2006, that does not alter the fact that your entitlement to the actual ERB will be an entitlement provided to you from the Agreement 2009-2012 under which you were not covered as at 9 May 2006. The relevant clauses from that certified agreement confirms that this agreement is comprehensive and operates to the exclusion of the Award.

Although the Award was current as at 9 May 2006, and is still current, the Agreement 2009-2012 however did not exist as at 9 May 2006. That is, you were not covered by the Agreement 2009-2012 as at 9 May 2006.

Consequently, it cannot be said that the ERB payment will be made to you because of your entitlement to it under a written contract or agreement in force just before 10 May 2006 as required by subsection 82-10(1) of the ITTPA in order to be considered a transitional termination payment.

The above interpretation of the provisions in the ITTPA for transitional termination payments is consistent with the ATO Interpretative Decision ATO ID 2007/163.

In ATO ID 2007/163, the Commissioner considered whether the employment termination payments made under a workplace agreement entered into after 10 May 2006 were transitional termination payments if the terms under which the payments were made were the same as or identical to the terms under a workplace agreement in place just before 10 May 2006.

The Commissioner determined the ETPs made under a new workplace agreement entered into after 10 May 2006 were not transitional termination payments. Both agreements were identical in providing for the making of payments in lieu of notice which were considered ETPs. The new agreement replaced the agreement that was in force just before 10 May 2006 .

Although the payments qualified as ETPs, they were not entitlements provided for under an agreement that was in force just before 10 May 2006. Therefore the ETP did not qualify as a transitional termination payment under subsection 82-10(1) of the ITTPA.

On the basis of the facts in your case, it has been established that the actual entitlement to the ERB will be provided to you under the Agreement 2009-2012 and not under the Award.

The Agreement 2009-2012 replaced the previous collective agreement and notwithstanding the terms of the entitlement to the ERB are the same under both the previous certified agreement that existed prior to Agreement 2009-2012 and the Agreement 2009-2012, the ERB will not be a transitional termination payment for the purposes of section 82-10 of the ITTPA.

This is because entitlement to the ERB will be provided for under the relevant provisions of the Agreement 2009-2012 (the new agreement that was first entered into on or after 10 May 2006). In other words, the ERB will not be an entitlement provided for under an agreement as in force just before 10 May 2006 as is required under section 82-10 of the ITTPA to qualify as a transitional termination payment.

Issue 2

Question 1

Can the proposed contribution to a superannuation fund in the 2011-12 income year be treated as a directed termination payment?

Summary

As the ERB will not be a transitional termination payment, consequently, the proposed contribution of the ERB to a complying superannuation fund in the 2011-12 income year cannot be treated as a directed termination payment.

Detailed reasoning

As the ERB will not be a transitional termination payment, consequently, it cannot be treated as a directed termination payment for the purposes of section 82F of the ITTPA if the ERB were to be contributed into a superannuation fund. The provision under section 82-10E of the ITPPA requiring the payer of a transitional termination payment to give the payee a pre-payment statement will also not apply to the ERB payment.

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