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Ruling
Subject: Transitional termination payment
Question
Can a taxpayer who was paid a transitional termination payment in the 2011-12 income year specify the component they wish to take in cash and that which they want paid to their superannuation fund as a directed termination payment?
Answer: Yes
This ruling applies for the following periods
Year ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts and circumstances
In the 2011-12 income year the Employer paid one of employees (the Employee) a termination payment (the Payment).
The Employer determined the Payment to be a Transitional Termination Payment (TTP).
The TTP was not in relation to a genuine redundancy.
The gross amount of the TTP has been provided as have the Taxable component and Tax-free component amounts which comprised the Payment.
Prior to 30 June 2012 the Employee completed a 'Transitional termination payment pre-payment statement' wherein the Employee requested the Taxable component be rolled over into a superannuation fund (the Fund) as a Directed Termination Payment (DTP).
The Employee took the remainder of the TTP in cash.
The Employer subsequently sent a Directed Termination Payment summary (DTP Summary) to the Fund showing, amongst other items, the Taxable component amount in the 'Directed components' section.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 295-190(1)
Income Tax Assessment Act 1997 Division 306
Income Tax (Transitional Provisions) Act 1997 Division 82
Income Tax (Transitional Provisions) Act 1997 Section 82-10
Income Tax (Transitional Provisions) Act 1997 Section 82-10F
Reasons for decision
Summary
The Employee can specify which component of a transitional termination payment to take in cash and which component to pay into a superannuation fund as a directed termination payment.
Detailed reasoning
Employment termination payments cannot be rolled over into a complying superannuation fund (the fund), unless the payment qualifies as a transitional termination payment (TTP) under section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA).
Under section 82-10 of the ITTPA, a life benefit termination payment received between 1 July 2007 and 30 June 2012 is a transitional termination payment where it satisfies all of the requirements set out under section 82-10 of the ITAA 1997.
In the Employee's case, it is accepted that the employment termination payment, the Payment, is a TTP.
Accordingly, under the transitional arrangements the Employee could choose, which the Employee has done in this case, to direct all or part of an employment termination payment to be made on the Employee's behalf to a superannuation fund.
Further, where a person directs a payment, that is, all or part of an TTP, to be paid into a fund, that directed termination payment is not assessable income and is not exempt income of the individual.
Directed termination payments
Section 82-10F in Division 82 of the ITTPA 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 ITAA 1997. Item 3 of the table shows the taxable component of a directed termination payment (within the meaning of section 82-10F of the ITTPA) is assessable income of a complying superannuation fund, a complying approved deposit fund and a retirement savings account provider.
In this case, the facts show the Employee and Employer satisfied all of the requirements set out under section 82-10F of the ITTPA with the end result that :
(i) the Employee directed the Employer to pay all of the taxable component of the TTP payable to the Employee in the 2011-12 income year to a complying superannuation fund; and
(ii) the Employee took the Tax-free component of the TTP in cash.
In relation to the Employee's decision to direct all of the taxable component to a superannuation fund and take the tax-free component in cash, it should be noted that Division 82 of the ITTPA does not specify that a taxpayer cannot choose which components to take as a TTP and which to include in a directed termination payment (DTP).
It is noted the rollover provisions for superannuation lump sums in Division 306 of the ITAA 1997 specify that a rollover is a payment from a superannuation entity however Division 82 of the ITTPA deals with TTPs and DTPs in a different manner. Section 82F of the ITTPA specifies that a DTP is a TTP or part of a TTP rather than being a separate payment as is the case with a superannuation lump sum rollover.
The components of a TTP, as indicated in the Guide for employers - Employment termination payments are calculated prior to the payer providing the taxpayer with a pre payment statement rather than as separate calculations for the DTP and TTP after the election by the taxpayer.
Due to the silence of Division 82 of the ITTPA on the choice of components and the above discussion it is considered that a taxpayer could make a choice of which components would be in the DTP and which would be in the TTP. Accordingly, the Employee's choice to take the tax-free component in cash and have the taxable component treated as a DTP is acceptable.
In view of the above, the taxable component of the DTP is to be included in the income year in which it is received by the superannuation provider as assessable income of the fund.
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