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Ruling

Subject:

Transitional termination payment

Question

Is any part of a genuine redundancy payment made by an employer (the employer) a transitional termination payment as defined in section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A)?

Answer

Yes.

This ruling applies for the following periods

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

The employer will make termination payments due to genuine redundancy to certain employees where the entitlement to that payment arises under an employment contract which was entered into prior to 10 May 2006.

The employment contract specifies that the quantum of the payment is the greater of the amount specified in the contract or an amount calculated under the Redundancy, Redeployment and Retrenchment Agreement.

The Redundancy, Redeployment and Retrenchment Agreement has been replaced by subsequent Enterprise Agreements.

Prior to May 2006 the Redundancy, Redeployment and Retrenchment Agreement was replaced by the employer's Enterprise Agreement 2006 (2006 EA).

The 2006 EA was replaced in early 2011 by the current employer's Enterprise Agreement 2011 (2011 Agreement).

A retrenchment payment under the 2006 Agreement, is referred to at a specified clause and states that an employee will be paid a lump sum severance payment of all claims of additional notice, retrenchment pay or any other similar payment on termination. The lump sum payment is based on an employee's continuous service and will be either a specified amount or the amount calculated on the basis of a table in the 2006 Agreement, whichever is greater.

The Table at a specified clause of the 2006 Agreement at a specified group shows a number of weeks total remuneration package (TRP) for each specified number of years service.

In addition a pro rata payment applies for each completed month in the final year of continuous service.

Under the 2011 Agreement, retrenchment payments at a specified clause states an employee will be paid a lump sum severance payment of all claims of additional notice, retrenchment pay or any other similar payment on termination. The lump sum payment is based on an employee's continuous service and will be either a specified amount or the amount calculated on the basis of a table in the 2011 Agreement, whichever is greater.

The Table at a specified clause of the 2011 Agreement at a specified group shows a number of weeks TRP for each specified number of years service.

In addition a pro rata payment applies for each completed month in the final year of continuous service.

Based on the above, both the 2006 and 2011 Agreements use the same methodology to calculate payments for redundancy.

Two employees who have recently been made redundant, have provided authorisation for the employer to request a ruling regarding the tax payable for their payments to be made in the 2011-12 income year.

Both employees have provided copies of their contracts of employment.

Employee A

In a letter dated late 2001, Employee A was offered employment with the employer in a specified position on the terms and conditions as set out in the letter.

Employee A accepted the offer to commence employment with the employer signing the relevant Employment Service Agreement (ESA) in late 2001. This ESA was the only contract of employment between Employee A and the employer.

The terms in respect of a redundancy payment under Employee A's ESA state that upon termination of employment the employer will pay to Employee A the greater of a Termination Payment equal to a specified number of weeks TRP; or the redundancy payment calculated in accordance with Redundancy, Redeployment and Retrenchment Agreement (less any payment in lieu of notice required to be made under that agreement).

Employee A's employment was terminated because of redundancy in late 2011 and the payment to be made in the 2011-12 income year is calculated under the Table at a specified group of the 2011 Agreement.

Employee A is to receive a specified number of weeks TRP having completed a specified number of years continuous service.

Employee B

Over 25 years ago, Employee B commenced employment with the employer.

In a letter dated late 1999, Employee B was offered another specified position with the employer on the terms and conditions as set out in the letter.

Employee B accepted the terms and conditions which applied from late 1999 by signing an ESA in early 2000. This ESA was Employee B's only employment contract from signing until Employee B's departure in early 2012.

The terms in respect of a redundancy payment under Employee B's ESA state that upon termination of employment the employer will pay to Employee A the greater of a Termination Payment equal to a specified number of weeks TRP; or the redundancy payment calculated in accordance with Redundancy, Redeployment and Retrenchment Agreement (less any payment in lieu of notice required to be made under that agreement).

Employee B's employment was terminated because of redundancy in early 2012 and the retrenchment payment to be made in the 2011-12 income year is calculated under the Table at a specified group  of the 2011 Agreement.

Employee B is to receive a specified number of weeks TRP having completed a specified number of years continuous service

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130.

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

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

Reasons for decision

Summary

The amount in excess of the tax free amount of the genuine redundancy payments to be made to each former employee will be a transitional employment termination payment in 2011-12 income year.

Detailed reasoning

Transitional termination payment

A life benefit termination payment made between 1 July 2007 and 30 June 2012 may be a transitional termination payment under section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A).

Under subsection 82-10(1) of the IT(TP)A, a life benefit termination payment received on or after 1 July 2007 is a transitional termination payment in the following circumstances:

(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.

The terms contract, law and agreement all connote circumstances that are binding on the employer. The circumstances as they exist just before 10 May 2006, must be such that the employer is obliged by force of a contract, law or agreement to pay a specific amount or to pay an amount according to the specifications of a method or a formula. As explained at paragraph 4.67 of the Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006, a person must be entitled as at 9 May 2006, to a payment on termination of employment.

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 (eg, shares). [Schedule 2, item 2, subsections 82-10(3) and (4)]

The first issue for consideration is whether the payment to be made to an employee satisfies the requirement of being an entitlement under a written contract.

Essentially, in order for the entitlement to be provided for under a particular employment agreement as in force just before 10 May 2006 an employee must have been entitled to receive a payment under the agreement just before 10 May 2006. Further, the agreement must still be in place when the payment is made, and the employee must still be entitled to that payment at the time of their termination.

This means that if, for instance, the employee is employed under a different agreement at the time of termination, or if the provision relating to the payment has been amended between 9 May 2006 and the time of termination, the payment will not meet this requirement of a transitional termination payment.

In this case, the two employees of the employer were employed under employment contracts which were entered into prior to 10 May 2006. Both contracts were the only contracts in place from the date of signing until the date of termination.

Both contracts stated that on termination of employment due to redundancy they were entitled to a payment which was either the greater of a termination payment equal to a specified number of weeks pay based on the their TRP, or the payment calculated in accordance with the terms under the relevant Redundancy, Redeployment and Retrenchment Agreement.

Although both employees were paid their termination payments calculated in accordance with the 2011 Agreement, this agreement calculated their payments using the same methodology as the 2006 Agreement which was in place prior to 10 May 2006.

The retrenchment payments to be made in the 2001-2012 for both employees have been calculated under the same condition and method of calculating their entitlements on redundancy as terms under the 2006 Agreement which was in place just before 10 May 2006. As such, both employees' contracts of employment allow for their payments to be determined by their pre May 2006 contracts.

Hence, as the payments are being made under a contract, law, instrument or agreement as in force just before 10 May 2006, the payments are considered to be a transitional termination payment.

Consequently, all the requirements under section 82-10 of the IT(TP)A have been satisfied. The amount in excess of the tax free amount of the genuine redundancy payments to be made to each former employee will be a transitional employment termination payment in 2011-12 income year as defined in section 82-10.

Under the transitional arrangements, the employee may choose to direct an employment termination payment to be made on their behalf to a superannuation fund.

Transitional employment termination payments may be:

· rolled-over (in full or in part) to a superannuation fund, ADF or RSA; or

· used (in full or in part) to buy a superannuation income stream before 1 July 2012.

Under the transitional arrangements, you may choose to direct an transitional termination payment to be made on your behalf to a superannuation fund.

If you direct the payment to be made into a complying superannuation fund the payment is not assessable income and is not exempt income.

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 individual's behalf as directed.

Choice to make 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.

Transitional employment termination payments that are not directed into a superannuation fund

Transitional termination payments are made up of two components:

· Tax fee component - this includes the post-June 1994 invalidity or pre-July 83 component (if any); and

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

The taxable component of a transitional termination payment paid in cash, forms part of your assessable income.

The amount of tax on the taxable component depends on the person's age and whether they received any earlier transitional termination payments, including directed termination payments, as shown in the following table:

* Preservation age is the age at which retirees can access their superannuation benefits. This will be 55 for persons born before 1 July 1960 and between 55 and 60 for persons born after 30 June 1960.

** The lower cap amount for the 2011-1 income year is $165,000 and is subject to annual indexation.

Both the lower cap amount and the $1 million (upper cap amount) are reduced by all amounts received by the person that have previously used the transitional termination payments concession.

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