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Ruling

Subject: transitional termination payment

Question:

Will the employment termination payment paid to you in the 2009-10 income year meet the requirements to be a transitional termination payment?

Answer:

No.

This ruling applies for the following period:

1 July 2009 to 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts and circumstances:

You commenced employment with your former employer more than 30 years ago.

You remained employed until your termination of employment which occurred during the 2009-10 income year.

You were employed under an enterprise bargaining agreement (EBA) up to the termination of your employment.

As part of the terms of your employment contract under the EBA, you were required to hold a licence issued by the relevant authority associated with your particular employment position to perform your duties.

Your suffered a medical condition which prevented you from satisfying the medical standards set by that relevant authority and consequently your licence was cancelled during the 2009-10 income year.

The relevant EBA that applied to your employment during the 2009-10 income year was an earlier EBA that had been extended and varied by an Australian Industrial Relations Commission (AIRC) decision made in  May 2009. That EBA as extended and varied was the most recent EBA that applied to you at the termination time.

You stated the relevant EBA as extended and varied in May 2009 is the applicable EBA that applies to your termination as no other EBA had been ratified by that time.

The effect of the AIRC decision of May 2009 was that:

· the previous EBA would remain in force until December 2010.

· the EBA was varied by a total of over100 items affecting clauses and schedules in the EBA.

Under the particular clause contained in both the EBA that operated prior to and after the AIRC decision of May 2009, your former employer was required to maintain an insurance plan in relation to loss of licence (LOL) capital benefits relevant to your employment requirements under the EBA.

Under the terms of that insurance plan you were entitled to a capital benefit payment because:

· The cancellation of your licence was as a result of your failure to meet the medical standards set by the relevant authority because of your medical condition; and

· The medical condition was unlikely to alter within a certain time frame.

According to the Copy of the Deed of Release you co-signed with your former employer during the 2009-10 income year:

· you made a claim for a loss of licence capital benefit under the employer insurance plan following the cancellation of your licence.

· your employment terminated on medical grounds effective on the date the Deed of Release was executed.

· the lump sum paid to you was the agreed sum your former employer paid you upon your termination of employment on medical grounds as an employment termination payment (ETP).

You received the agreed lump sum of capital benefits from your former employer during the

2009-10 income year pursuant to the LOL insurance plan under the relevant EBA.

You have provided the following supporting documents:

· The relevant EBA and LOL insurance policy annexed to the EBA.

· Copy of the Deed of Release from your former employer on termination of employment.

· Details of the termination payment (the agreed lump sum for loss of licence capital benefit.

The summary of the termination payment details confirm :

· Your former employer paid the amount to you as an ETP from which an amount of has been withheld for tax.

· No part of the ETP has been treated as a transitional termination payment.

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 lump sum termination payment (loss of licence capital benefit) you received in the 2009-10 income year is an employment termination payment (ETP). However, the ETP does not meet the 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.

The first condition to be met is that there must be an employment termination payment that is made in consequence of the termination of employment of the taxpayer.

In Taxation Ruling 2003/13 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment : meaning of the phrase 'in consequence of' (TR 2003/13), the Commissioner considered the meaning of the phrase 'in consequence of' as interpreted by the Courts. In paragraphs  5 and 6 of TR 2003/13 the Commissioner states:

5. The phrase 'in consequence of' is not defined in the ITAA 1936. However, the words have been interpreted by the courts in several cases. Whilst there are divergent views as to the correct interpretation of the phrase, 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.

6. The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

Therefore, if the payment follows as an effect or a result from the termination of employment, the payment will be made in consequence of the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. Hence the payment will be a life benefit employment termination payment unless the payment is specifically excluded under section 82-135 of the ITAA 1997.

Based on the information provided, it is evident the termination payment you received as the loss of licence capital benefit pursuant to the relevant clause of the EBA was paid to you in consequence of the termination of your employment.

As part of the terms of your employment contract under the EBA, you were required to hold a licence issued by the relevant authority to perform your duties. Your former employer was required under this employment agreement in accordance with the terms of the EBA to maintain the LOL insurance plan which provided employees who lost their licence on medical grounds were entitled to lodge a claim for capital benefits.

Your licence was cancelled due to your medical condition and you lodged a claim for a capital benefit under the employer LOL insurance plan. Before making the payment to you, your former employer required you to sign a Deed of Release which provided, among other things, that your former employer would pay you the agreed lump sum amount upon medical termination of employment.

Therefore, from the information provided, it can be concluded that there is a nexus between the payment of the LOL capital benefit (the agreed lump sum on the Deed of Release) and the termination of your employment which occurred during the 2009-10 income year. Thus, subparagraph 82-130(1)(a)(i) of the ITAA 1997 will be satisfied.

As your employment terminated during on a day during the 2009-10 income year and the payment was received by you on that date, 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 amount is not an amount specifically excluded under section 82-135 of the ITAA 1997.

Therefore the whole amount of the agreed lump sum payment is an ETP as defined in subparagraph 82-130(1)(a)(i) and paragraph 82-130(1)(b) of the ITAA 1997.

In accordance with subsection 82-130(2) of the ITAA 1997, the agreed lump sum for loss of licence capital benefit is also a life benefit termination payment being an ETP to which subparagraph 82-130(1)(a)(i) applies.

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.

As discussed previously, in order to be a transitional termination payment, a life benefit termination payment received needs to satisfy the requirements of subsection 82-10(1) of the ITTPA.

Therefore the first issue for consideration is whether the lump sum ETP that was made to you during the 2009-10 income year by your former employer under the relevant EBA that applied to you at the termination time 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; and

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

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:

4.67 The transitional arrangements apply where a person is entitled, as at 9 May 2006, to a payment on termination of employment under a written contract, Australian or foreign law, legal instrument or workplace agreement made under the Workplace Relations Act 1996, provided that the payment is made before 1 July 2012. Such a payment is referred to as a 'transitional termination payment'. Payments to which these transitional arrangements apply are not taxed under the normal employment termination payment provisions in the ITAA 1997. [Schedule 2, item 2, subsections 82- 0(1),(2),(5) and (6)]

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)]

You stated that the previous EBA that applied was extended and varied by the decision made by the AIRC in May 2009 was the most recent EBA that applied to you at the termination time.

It can be seen the effect of the AIRC decision of May 2009 was that the nominal expiry date of that previous EBA would be extended to December 2010.

However, it can be also be established from that AIRC decision of May 2009 that the application had also sought to vary a substantial part of the EBA. It can be seen that the items of variation are extensive and the order as made came into force from May 2009.

It is evident the ETP was paid to you under the relevant clause of the relevant EBA pursuant to the employer LOL insurance plan which provided for payment of the loss of licence capital benefit as you met the conditions for payment pursuant to the relevant clause of the LOL insurance policy.

The relevant EBA under which you were covered is considered a collective agreement within the meaning of the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009.

The terms under the relevant clause of the relevant EBA that came into force from May 2009 are identical to the terms under the relevant clause of the EBA that was in place prior to the amended and extended EBA following the May 2009 decision.

The agreed lump sum for the loss of licence capital benefit was paid under the relevant EBA which came into force by the order made following the AIRC decision in May 2009. However, the EBA was extended and varied substantially.

From the above, it can be established that the extended and varied EBA which came into force from May 2009 was the most recent EBA that applied to you at the termination of your employment during the 2009-10 income year.

It can also be seen that the terms under the relevant EBA that existed both prior to and since the AIRC decision of May 2009 are identical in providing for capital benefits payable on loss of licence claims under the relevant clause for the employer LOL insurance plan.

However, it cannot be said the order made as a result of the AIRC decision of May 2009 merely extended the operative date of the EBA to December 2010. In fact, that order substantially varied the EBA by a large number of items and effectively replaced the EBA that was in force just before 10 May 2006. The EBA as extended and varied by the AIRC decision of May 2009 came into force after 10 May 2006.

As you were covered by the relevant EBA (as extended and varied by the AIRC decision of May 2009 which came into force after 10 May 2006) on your termination date during the 2009-10 income year, the payment of the agreed lump sum does not satisfy the requirement of paragraph 82-10(1)(a) of the ITTPA. That is, it is not an entitlement provided to you under a collective agreement as in force just before 10 May 2006.

Accordingly, the agreed lump sum paid to you by your former employer in the 2009-10 income year was not 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.

As it fails the requirement of subsection 82-10(1), it does not become necessary to consider the further requirements of subsections 82-10(3) and 82-10(4) of the ITTPA.

The above is consistent with the ATO view in ATO ID 2007/163 where the Commissioner considered employment termination payments made under a workplace agreement, entered into after 10 May 2006 were not transitional termination payments even if the terms under which the payments are made are the same as the terms under a workplace agreement in place just before 10 May 2006.

Although your case can be distinguished from the facts in ATO ID 2007/163, it is however evident the relevant EBA had not merely been extended to operate until December 2010 but had been substantially varied to become a replacement EBA because of the AIRC decision of May 2009.

Notwithstanding the entitlements to the payment of capital benefits for loss of licence pursuant to the relevant clause for LOL insurance benefits are the same under both the EBA that existed prior to and since the AIRC decision of May 2009, the life benefit termination payment (the agreed lump sum for capital benefits) was paid to you under the relevant provisions of the agreement that was first entered into and came into force on or after 10 May 2006 (the EBA as extended and varied by the AIRC decision of May 2009) and not under the version of the EBA that existed prior to the AIRC decision of May 2009.

Hence, as the payment was not made under an agreement in force just before 10 May 2006, it is not a transitional termination payment for the purposes of subsection 82-10(1) of the ITTPA.

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