Edited version of your private ruling

Authorisation Number: 1012104028339

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Transitional termination payment

Questions

1. Is any part of the payment received on termination of employment a transitional termination payment?

2. If yes, is any part of the transitional termination payment a directed termination payment?

Answer

1. No

2. Not applicable as the answer to Question 1 is No.

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Your client commenced employment with an entity (the Entity) in 1985.

His employment contract dated in June 20XX (June 20XX contract) became effective on appointment to the position of Executive Director and contained relevant clauses and schedule.

Your client signed the June 20XX contract as acceptance that he agreed to the terms of employment set out in the employment agreement (including the Remuneration Entitlements Schedule attached to the June 20XX contract).

You stated the operative date according to Clause 2 of the June 20XX contract was April 20XX.

A contract variation was sought by the Entity in June 2008 and you stated this variation was not accepted by your client nor was any revised contract document signed by him.

In December 2011 your client received a redundancy payment and The Entity issued a benefit statement (Final Payment Summary) including the following components:

Employment Termination Payment

Severance Payment $X

Sub-Total Non-Transitional Termination Payments $X

Less TAX FREE BONAFIDE REDUNDANCY PORTION (3) $Y

Total Non-Transitional Termination Payment remaining $Z

You stated that the Entity had argued that unless the contract variation was signed, the retrenchment payment would be calculated on a notional salary of 65% of your client's total employment cost (TEC amount).

In your letter of February 20XX, you advised:

· your client "does not have on record documentation relating to the proposed contract variation given he did not, nor did he intend to accept the change which was unnecessary. In fact, it removed his right to receive a transitional ETP in the event of retrenchment."

· The Entity did not exercise their right under Clause 14 presumably because it could not be considered that consent was unreasonably withheld. This fact is further evidenced by the document enclosed as Schedule C which was only received just prior to our client's termination of employment. This document clearly shows no action was taken in 2008 to force our client to accept the change of contract."

· The Entity purports to have paid the amount pursuant to the proposed contract variation. They believe this to be the case, notwithstanding the calculation in our client's case would be the same as if paid under the June 20XX contract. Our client has not signed the proposed contract variation. He received the attached document, Schedule C, in which the Entity recommended two options. He chose option 1, because he, and we agree, believes that amount was what he was entitled to under his actual contract. The June 20XX contract was the only contract he has signed and again this is of course is the basis of the dispute."

You provided a copy of Schedule C with your letter of February 2012.

The Entity has not issued a PAYG payment summary to your client in respect of the severance payment received.

Relevant legislative provisions

Income tax Assessment Act 1997 Section 82-10

Income tax Assessment Act 1997 Section 82-125

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 (Transitional Provisions) Act 1997 Section 82-10.

Income tax (Transitional Provisions) Act 1997 Subsection 82-10(1).

Income tax (Transitional Provisions) Act 1997 Paragraph 82-10(1)(a)

Income tax (Transitional Provisions) Act 1997 Paragraph 82-10(1)(b).

Income tax (Transitional Provisions) Act 1997 Subsection 82-10(3).

Income tax (Transitional Provisions) Act 1997 Section 82-10F

Reasons for decision

Summary of decision

No part of the payment received on termination of employment is a transitional termination payment because the entitlement was not provided for under a contract, instrument or agreement as in force just before 10 May 2006.

As the payment is not a transitional termination payment, it does not become necessary to consider if the payment is a directed termination payment.

Detailed reasoning

Employment termination payment

Subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines a payment is an employment termination payment if:

· it is received by the person in consequence of the termination of their employment (subparagraph 82-130(1)(a)(i));and

· it is received no later than 12 months after that termination (paragraph 82-130(1)(b)); and

· it is not a payment mentioned in section 82-135 (this sections lists the specific payments that are not employment termination payments).

A life benefit termination payment is an employment termination payment to which subparagraph 82-130(1)(a)(i) applies.

Transitional termination payment

Life benefit termination payments may qualify as a transitional termination payment under section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A).

Subsection 82-10(1) of the IT(TP)A 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 IT(TP)A 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.

From the information provided, it is evident the severance payment of $X received by your client in December 2011 was made in consequence of the termination of his employment that occurred in November 2011.

Paragraph 82-130(1)(e) of the ITAA 1997 excludes the tax free part of a genuine redundancy payment ($Y) being an employment termination payment.

Therefore the balance of the severance payment $Z($X minus $Y) will meet the requirements in subparagraph 82-130(1)(a)(i)) of the ITAA 1997 as an employment termination payment.

To further consider if the life termination payment is a transitional termination payment, it becomes necessary to consider whether the payment of $Z meets the requirement of being an entitlement that is provided for under a written contract as in force just before 10 May 2006.

The explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 which introduced section 82-10 of the IT(TP)A 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)]

Contract in force before 10 May 2006

Paragraph 82-10(1)(b) of the IT(TP)A requires that the entitlement is provided for under that contract as in force just before 10 May 2006. Furthermore, subsection 82-10(3) 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.

It is noted that Clause 8 of the June 20XX contract states that the Entity has policies and procedures that apply to your client's employment which may be amended by the Entity from time to time. They are not incorporated into or otherwise included in the contract of employment with the Entity, including the particular employment agreement.

In your letter of February 2012, you stated the Entity purports to have paid the severance amount pursuant to the proposed contract variation and that your client received the document (Schedule C) in which the Entity had recommended two options for your client to choose from. You advised that your client had chosen option 1.

In examining the content in Schedule C, it can be seen that the Entity referred to the time (in June 2008) when they had sought agreement from your client to vary the redundancy and retrenchment formula in the June 20XX contract.

The following is extracted from the relevant paragraphs in Schedule C:

· Schedule C

· "You may remember that in June 2008, we wrote to you seeking your agreement to vary the redundancy and retrenchment formula in your contract of employment. This was in response to changes in the Super Guarantee legislation.

· As we did not receive a signed letter back from you, the new contractual redundancy and retrenchment formula (which incorporates the marked related top up payment previously paid under policy) does not apply to you.

· As the policy that provided the market related top up payment no longer applies (as it is incorporated into the new contractual formula), we are now offering you two choices:

1. Agree to the variation - this will mean that you are entitled to the market related top up payment but the transitional arrangements will not apply.

2. Stick with the old redundancy calculation - this will mean that you are not entitled to the market related top up payment but the transitional arrangements will apply.

We have provided you with the two final payment summaries so that you can clearly see what your entitlements would be under each of the above options."

The Entity explained to your client that if he were to choose option 1 of Schedule C, it would mean he was entitled to the market related top up payment but the transitional arrangements will not apply. In your letter of February 2012 you stated your client chose option 1.

Therefore the June 20XX contract (as varied) came into force after 10 May 2006 following your client's choice.

In order to consider if the severance payment is a transitional termination payment for the purposes of paragraph 82-10(1)(b) of the IT(TP)A, the Commissioner must determine if the severance payment was an entitlement arising from the contract in force as at 9 May 2006 (the June 20XX contract prior to the variation) or under the June 20XX contract that was varied after 10 May 2006.

Although your client would have been covered by the June 20XX contract as at 9 May 2006 if he had been terminated from his employment at that time, the fact remains that the severance payment was paid to him pursuant to the varied June 20XX contract and was not paid to him under the June 20XX contract that was in force before 10 May 2006.

The Entity calculated the severance payment under the varied June 20XX contract. They had stated to your client that the effect of choosing option 1 (in Schedule C) would mean the transitional arrangements would not apply to him. The market related top up payment no longer applied and had been incorporated into the new contractual formula. Your client's choice of option 1 meant he agreed to the variation of the June 20XX contract and this came into force after 10 May 2006.

Whilst the June 20XX contract (prior to the variation taking place) provided an entitlement to receive the severance payment, the actual payment made was calculated in accordance with the varied June 20XX contract and thus was an entitlement arising from the varied June 20XX contract, under which he was not covered as at 9 May 2006.

Consequently, it cannot be said that the payment made to him was received because of an entitlement that is provided for under a written contract or agreement as in force just before 10 May 2006 as required under subsection 82-10(1) of the IT(TP)A to be a transitional termination payment.

It is the Commissioner's view that any employment termination payment made under a written agreement entered into, on or after 10 May 2006, are not transitional 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.

The Commissioner considers your client has stated to the Entity that he has agreed to the variation of the June 20XX contract by choosing option 1 of Schedule C.

Although, the severance payment is an entitlement made in consequence of the termination of his employment and is an employment termination payment, it does not qualify for further concessional treatment as a transitional termination payment as it does not meet the condition in paragraph 82-10(1)(b) of the IT(TP)A in order to qualify as a transitional termination payment.

As the payment is not a transitional termination payment, it does not become necessary to consider if the payment is a directed termination payment.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).