Edited version of private ruling

Authorisation Number: 1011468205459

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Ruling

Subject: transitional termination payment

Is any part of the payment to be received by your client on termination of employment a transitional termination payment as defined in section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A)?

No.

This ruling applies for the following period

Year ending 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

Your client is under preservation age.

Your client's employment was terminated in the 2009-10 income year.

Your client was covered by an agreement in place before 10 May 2006 (the Company A Agreement).

Subsequently, the business under which your client was employed was purchased by another company and an application was made to vary and extend the Company A Agreement.

The variation of the Company A Agreement was made in order to update the employer name, extend the expiry date of the agreement and update the wage rates. All other information has remained the same.

In an order by Fair Work Australia, the Company A Agreement was deleted in its entirety and replaced with the new consolidated agreement (Company B Agreement).

The Company B Agreement came into force in the 2009-2010 income year.

You have advised that an employment termination payment will be made to your client in the 2009-10 income year in accordance with the Company B Agreement.

Relevant legislative provisions

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).

Reasons for decision

Summary of decision

The payment your client will receive on termination of employment is not a transitional termination payment because it was provided for under a contract, instrument or agreement that came into force on or after 10 May 2006.

Detailed reasoning

Transitional termination payment

Employment termination payments cannot be rolled over into a complying superannuation fund, unless the payment qualifies as a transitional termination payment under section 82-10 of the 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.

The first issue for consideration is whether a payment made in accordance with the company policy satisfies the requirement of being an entitlement under a written contract.

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)]

In this case, your client's redundancy entitlements and the formulas to calculate them are stated clearly in the Company B Agreement.

This will satisfy the requirement in paragraph 82-10(1)(a) of the IT(TP)A that the payment is received by a taxpayer because they have an entitlement under a written contract to the payment.

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) of the IT(TP)A 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.

The Commissioner considers that a payment made under an agreement entered into after 9 May 2006 will not be a transitional termination payment even if the terms under which the payment is made are the same as the terms of an agreement in place just before 10 May 2006. This is because the employer did not work out a specific amount of the payment as provided for by the agreement as in force just before 10 May 2006. The employer made the payment referencing the terms of the new agreement.

In this instance, your client was covered by an agreement in place before 10 May 2006 (the Company A Agreement). Subsequently, the business under which your client was employed was purchased by another company and an application was made to vary and extend the Company A Agreement. The variation of the Company A Agreement was made in order to update the employer name, extend the expiry date of the agreement and update the wage rates. All other information has remained the same. The Company B Agreement came into force in the 2009-2010 income year.

You have advised that an employment termination payment will be made to your client in the 2009-10 income year in accordance with the Company B Agreement. Therefore, the payment is not being made under an agreement that was in place just before 10 May 2006.

Further, as noted in the order by Fair Work Australia, the previous agreement was deleted in its entirety and replaced with the new consolidated agreement. This, together with the fact that the parties to the agreement have also changed, is clearly indicative that a new agreement was in place after 10 May 2006.

Consequently, the requirement in paragraph 82-10(1)(a) of the IT(TP)A is not satisfied. The payment to be made to your client is, therefore, not a transitional termination payment under section 82-10.