Edited version of your private ruling

Authorisation Number: 1012416327650

Ruling

Subject: Transitional termination payment

Question

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

Answer:

No.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

Your client (the Employee), commenced employment with the Employer over ten years ago.

A copy of your client's employment contract (the Contract) which was made with the Employer on commencement has been provided.

In the Contract, including a schedule (the Schedule), it stated amongst other matters:

· the position that your client was employed in and that your client may from time to time be assigned to other offices or capabilities by the Employer from the commencement date of the Contract until terminated;

· your client's responsibilities and leave entitlements; and

· details in relation to your client's remuneration and other benefits.

In cases of 'Termination' the Contract states the procedures and period of notice the Employer may give in certain circumstances.

Other clauses in the Contract which are of relevance in this case relate to:

· Redundancy -

if the employment is terminated on the grounds of redundancy, the Employee will be entitled to payment in lieu of notice provisions as listed in the Schedule.

· Corporate Policies -

the Employee is required to abide by all Corporate Policies and Procedures as issued and amended from time to time.

· the Agreement (the Contract) -

the Agreement embodies the entire terms agreed upon between the parties and supersedes any prior agreement.

In the Schedule, which was provided, the period of termination notice to be given by the Employer and the calculation of this payment, which included caps, depended on the Employee's period of service.

The only other payment on termination of employment mentioned in the Contract is payment in lieu of annual and long service leave.

In the relevant income year the Employer confirmed in a letter your client's appointment to another position. In the letter it also stated:

(a) your client's reporting would remain unchanged; and

(b) the redundancy arrangement was also unchanged to that in your client's original appointment letter. However, if your client's role was made redundant, your client, like all of the Employer's salaried employees, your client would be covered under the 'new policy' rather than a prior policy.

A copy of the Employer's Redundancy and Retrenchment policy (the prior policy) which existed prior to May 2006 has been provided. The Policy provides, in part:

(a) that redundancy is defined as a situation where

(i) an employee's employment is terminated by the employer;

(ii) the termination relates, wholly or mainly, to the position filled by the Employee is, or will become superfluous to the needs of the employer; and

(iii) the position cannot be replaced.

(b) the severance payment that an employee will receive which takes into account not only years of service and a cap but also an age loading.

(c) an Employee whose employment is terminated would be provided a specified period of notice when an position is made redundant and, in cases where an employee is over a certain age, that employee would receive an additional period of notice.

A copy of the Employer's new policy, which was made after 10 May 2006, has been provided and it shows:

(a) the policy only applies in cases of redundancy

(b) the notice period an employee will receive;

(c) the payment calculations; and

(d) the severance payment that an employee will receive, amongst other matters, has a different cap to that in the prior policy and does not have an age loading.

In the relevant income year your client's employment with the Employer was terminated.

A Calculation Sheet, which was prepared by the Employer, shows amongst other matters:

(a) your client's years of service;

(b) termination of employment was due to redundancy;

(c) your client's salary; and

(d) how the gross severance payment and payment in lieu of notice were calculated.

The Calculation Sheet also shows:

(a) part of the severance payment was treated as tax-free; and

(b) the amount of the severance payment in excess of the tax-free amount, was treated as an employment termination and taxed accordingly.

Within 12 months of your client's termination of employment, the Employer paid your client an employment termination payment (the Payment). The 'PAYG payment summary - employment termination payment' which was prepared by the Employer shows:

(a) the Payment comprised wholly of a Taxable component,

(b) the tax withheld;

(c) the Payment did not relate to a prior payment for the same termination; and

(d) the Employer did not consider the payment to be a transitional termination payment.

Your client stated that the Contract was the only employment contract which your client had entered into with the Employer.

Your client had reached preservation age when the payment was made.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 82-10(2).

Income Tax Assessment Act 1997 Subsection 82-10(3).

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 paragraph 82-130(4)(a)

Income Tax Assessment Act 1997 subsection 82-130(7)

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).

Reasons for decision

Summary

The severance payment made to your client does not meet all the requirements to be a transitional termination payment.

Consequently, the life benefit termination payment (that is, the total severance payment less the tax-free part of a genuine redundancy payment) is not a transitional termination payment and is treated as an employment termination payment.

Detailed reasoning

A payment made to an employee 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 total severance payment is paid in consequence of the termination of your client's employment with the Employer. Thus, subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

As your client's employment was terminated in the relevant income year, and the payment was received by your client in the same income year, the 12 month requirement under paragraph 82-130(1)(b) of the ITAA 1997 was satisfied.

Section 82-135 of the ITAA 1997 specifically excludes certain payments from being employment termination payments. One such payment is the tax-free part of a genuine redundancy payment. In your client's case, the facts show the total severance payment includes a tax-free part of a genuine redundancy payment.

Accordingly, the amount to be treated as an employment termination payment under subsection 82-130(1) of the ITAA 1997 is the gross severance payment less the tax-free amount calculated in accordance with the formula in section 83-170 of the ITAA 1997.

It should be noted that the amount in excess of the tax-free amount of the genuine redundancy payment is a life benefit termination payment (LBTP) and subsection 82-10(2) of the ITAA 1997 provides that the taxable component of the LBTP is assessable income. Further, subsection 82-10(3) specifies that the taxable component, in this case the whole of the LBTP, is subject to tax depending on the recipient's age.

Transitional termination payment

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

Subsection 82-10(1) of the ITTPA 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. (emphasis added)

Furthermore, subsections 82-10(3) and 82-10(4) of the ITTPA state:

(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.

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

In this case your client was entitled to a payment, a life benefit termination payment, in accordance with a written employment contract which was entered into between your client and the Employer in the specific income year (the Contract). Further it is noted that your client states this was the only contract your client had with the Employer.

Contract in force before 10 May 2006

Paragraph 82-10(1)(b) of the ITTPA requires that 'the entitlement is provided for under that contract, law, instrument or agreement as in force just before 10 May 2006' [emphasis added]. Furthermore, subsection 82-10(3) of the ITTPA provides that the division applies to a payment only to the extent that the contract 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.

In this case the facts show that the clauses in the Contract which are of relevance in your client's case are those relating to employment termination entitlements.

The clause in the Contract which relates to redundancy states that if the employment is terminated on the grounds of redundancy, the Employee will be entitled to payment in lieu of notice provisions as listed in the Schedule.

The Schedule details the period of termination notice to be given by the Employer and the calculation of this payment, and caps that apply to any payment. It also specifies your client's entitlement to a payment of lieu of notice, based on your client's period of service with the Employer, up to the maximum cap.

In another clause in the Contract your client was required to abide by all Corporate Policies and Procedures as issued and amended from time to time. Accordingly, it can be seen that:

(i) the prior policy which started to apply before May 2006; and

(ii) its successor policy, the new policy, which was made after 10 May 2006;

each show how a redundancy payment would be calculated as at particular dates and that they form part of the Contract.

Though the facts show some changes were made to the above policies, it is considered the Contract which was entered into over 10 years ago was still in force when your client's employment was terminated in the relevant income year as:

(i) your client stated the Contract was the only contract your client entered into with the Employer;

(ii) your client was employed in a particular position and such other offices or capacities as may from time to time be assigned to your client by the Employer;

(iii) there is nothing to indicate the Contract was rescinded or replaced; and

(iv) when your client was offered a new position in the relevant income year, the Employer stated in a letter that your client's remuneration package and terms of employment would remain unchanged and the redundancy arrangement would also remain unchanged to that in your client's original appointment letter.

However, if your client's role was made redundant, your client, like all of the Employer's salaried employees, your client would be covered under the 'new policy' rather than a prior policy

In view of the above, it is considered that the policy changes represent variations to the Contract and the Contract which your client entered into over 10 years ago can be seen to have remained in force until your client's employment was terminated.

Notwithstanding the above, the transitional termination provisions also require that the amount of the payment is specified or could be determined by a method or formula stated in the contract as existed as at 9 May 2006. Hence, the method of calculating the entitlements must remain unchanged.

Payment in lieu of notice

The Contract and the prior policy contain provisions for payment in lieu of notice specify the manner in which that entitlement would be calculated prior to 10 May 2006.

As previously stated, the Contract's redundancy clause and the Schedule would operate to provide your client with an entitlement calculated up to the maximum allowed in view of your client's period of employment with the Employer.

In relation to notice period in the pre-2011 policy it states an Employee whose employment is terminated would be provided a specified period of notice when an position is made redundant and, in cases where an employee is over a certain age, that employee would receive an additional period of notice.

The above period, however, does not operate to reduce the amount actually payable to your client under the redundancy clause and the Schedule.

In your client's case, the Calculation Sheet shows the payment in lieu of notice was not based on the maximum amount your client would have been entitled to under the prior policy.

In comparing the calculation of the entitlement provided under the Contract and the prior policy, as existed before 10 May 2006, to the calculation used in the payment made to your client in the relevant income year it can be seen that they are not the same.

As a different method, to that which existed just prior to 10 May 2006, was applied to calculating this entitlement, it is considered subsections 82-10(3) and 82-10(4) of the ITTPA have not been satisfied. Accordingly, the payment in lieu of notice is not considered to be a transitional termination payment.

Severance payment

In relation to the balance of the severance payment made to your client, that entitlement is provided to your client in accordance with the applicable policies, incorporated into the Contract that is issued and amended from time to time.

In your client's case it is noted that the redundancy policy under which the entitlement was calculated was not under the policy which existed as at 9 May 2006, that is, the prior policy,' but under the new policy as shown in the letter from the Employer in the relevant income year which stated if your client's role was made redundant, your client, like all of the Employer's salaried employees, would be covered under the 'new policy' rather than a prior policy.

It is noted that in Perfrement v. Commissioner of Taxation 2011 AATA 264, 2011 ATC 10-179 (Perfrement), reference was made to a situation where a taxpayer was employed under a contract which was entered into prior to 10 May 2006. Further, the contract, which was the only contract entered into by the taxpayer, was subject to a 1991 redundancy policy to which changes were made in July 2008.

In September 2008 Perfrement's employment was terminated by reason of redundancy and one of the issues considered was whether policy changes made after 10 May 2006 created a new contractual arrangement resulting in the taxpayer's redundancy entitlements not being made under an agreement which was in force just before 10 May 2006.

The outcome in Perfrement was that Tribunal Member Dr. G Hughes held that the changes made to the policy did not vary the taxpayer's contract of employment as they did not alter the calculation of the entitlements but merely informed employees of a change in the application of tax laws to the entitlements.

In Perfrement it should also be noted that in paragraphs 11 and 20, in 2011 AATA 264, Member Dr. G Hughes stated:

11. The parties agree that a new contract of employment made after 10 May 2006 (or the variation of an existing pre-10 May contract after that date) would operate to prevent any subsequent payment made to the Applicant from being treated as a transitional termination payment. (emphasis added)

...

20. Section 82-10 requires that a payment, if it is to qualify as a transitional termination payment, must be made pursuant to an entitlement provided for under a contract in force before 10 May 2006; and a specific amount of that entitlement must be capable of precise calculation by reference to a term of that contract in force prior to that date. A new contract entered into after 10 May 2006, or variation to contract terms relevant to an employee's entitlement to redundancy payments, will prevent a termination payment being classified as a transitional termination payment. (emphasis added)

In your client's case, unlike Perfrement where there were no changes to the calculation of the taxpayer's entitlements, it is clear from the facts provided that the entitlement was not calculated in the same way to that which existed prior to 10 May 2006.

Under the prior policy it is particularly noted there were provisions in the calculation of entitlements for the application of an age loading and the maximum entitlement payable under a specified cap.

In relation to the new policy, under which your client received the entitlement, the Calculation Sheet shows:

(a) a lower cap to that in the prior policy was applied; and

(b) there was no age loading applied.

In view of the above, it is evident that the entitlement paid under the new policy was not calculated in the same manner as the policy which was in force as at 9 May 2006.

As a different method, to that which existed just prior to 10 May 2006, was applied to calculating your client's entitlement, it is considered subsections 82-10(3) and 82-10(4) of the ITTPA have not been satisfied. Accordingly, this entitlement is not considered to be a transitional termination payment.

Conclusion

The gross severance payment received by your client does not meet the requirements of section 82-10 of the ITPPA to be a transitional termination payment.

Consequently, the life benefit termination payment (that is, the total severance payment of less the tax-free part of a genuine redundancy payment) is not transitional termination payment.

In view of the above, the life benefit termination payment is to be taxed according to the rates that apply to employment termination payments which also take into account your client had reached their preservation age when the payment was made.

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