Edited version of private ruling

Authorisation Number: 1011656593875

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Ruling

Subject: Transitional termination payment

Questions

1. Is any part of the proposed employment termination payment in respect of severance pay, sick leave and payment in lieu of notice a transitional termination payment?

2. Is the proposal performance bonus reward incentive scheme payment an employment termination payment?

3. Is any part of the proposed performance bonus reward incentive scheme payment a transitional termination payment?

Answers

1. Yes

2. Yes

3. No

This ruling applies for the following period:

2010-11 income year

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

· You commenced employment with the Company a number of years ago.

· During employment, you and the Company were parties to a written employment contract (the Contract) entered into before 10 May 2006.

· The Company is also currently bound by an Enterprise Agreement (the Agreement). The Agreement came in force before 10 May 2006.

· The Agreement contains a clause that provides for payments to be made in the event of redundancy of positions covered by the Agreement. The Agreement provides the basis for calculating the redundancy payment.

· You and the Company were parties to a variation to the Contract, effective after 9 May 2006. The conditions of your employment remained unchanged with the exception of change of your position title and total employment cost.

· The variations to the Contract do not alter the formula in the Agreement for the calculation of your redundancy entitlements.

· Under the contract you are entitled to participate in the Company's performance bonus reward incentive scheme (the incentive scheme).

· Under the incentive scheme, salaried staff can earn up to a specified percentage of their salary, depending on their role within the Company.

· Under the incentive scheme, you were entitled to an amount which was calculated with reference to the performance of both yourself and the company.

· The percentage of your individual performance based bonus was determined by your annual competency rating.

· Under the incentive scheme, managers have the ability to add a discretionary amount to the standard payment, intended for exceptional one off performance rewards. Further, the payments must be approved by the Company's CEO and/or General Manager.

Under normal circumstances the standard annual incentive payment would have been paid on a specific date in the bonus year.

If you had resigned from the Company of your own accord prior to the specific date, you would not have been entitled to any payment under the incentive scheme.

The Company made the decision that all employees being made redundant as part of the Company's restructure would be paid out a proportion of their entitlement under the incentive scheme.

The incentive scheme has not changed since 9 May 2006.

Your employment with the Company ceased in the 2010-11 income year.

On termination of your employment with the Company, you are entitled to an amount which is pro-rated for the number of completed months worked in the bonus year.

The redundancy package was comprised of the following payments:

· Severance pay

· Sick Leave

· In lieu of Notice

Under the Agreement, an employee is entitled to these payments when their position is made redundant. Under the agreement, the sick leave payment is also payable on retirement.

Your leave entitlements are as follows:

· Annual Leave

· Long Service Leave

Your entitlement under the incentive scheme is a pro-rata of the incentive payment.

You are under 55 years of age.

Relevant legislative provisions

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 82-135.

Income Tax Assessment Act 1997 Paragraph 82-135(e).

Income Tax Assessment Act 1997 Subsection 83-170.

Income Tax Assessment Act 1997 Subsection 83-170(2).

Income Tax Assessment Act 1997 Section 83-175.

Income Tax Assessment Act 1997 Subsection 83-175(1).

Income Tax Assessment Act 1997 Subsection 83-175(3).

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

Income tax (Transitional Provisions) Act 1997 Subsection 82-10(6)

Reasons for Decision

Summary

The taxable component relating to the amount your employer proposes to pay to you on termination of your employment for severance pay, sick leave and payment in lieu of notice (the Payments), is considered to be both an employment termination payment and a transitional termination payment.

The tax-free component relating to these payments is excluded from being an employment termination payment under section 82-135 of the ITAA 1997. This component is the tax-free part of a genuine redundancy payment.

Accordingly, you are able to make a choice to direct the taxable component be paid into a complying superannuation fund, or to purchase a superannuation annuity before the payment is made.

The proposed performance bonus reward incentive scheme payment (the incentive payment under the incentive scheme) is not a transitional termination payment because the specific amount of the payment could not be worked out under a contract, instrument or agreement that came into force before 10 May 2006.

As the incentive payment is not a transitional termination payment it cannot be directed into a complying superannuation fund.

Detailed reasoning

Employment termination payment

A payment made to an employee on or after 1 July 2007 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 of the ITAA 1997.

Subsection 82-130(1) of the ITAA 1997 states:

(1) 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.

It is not considered necessary to examine in detail if the payment in respect of your severance payment, sick leave and payment in lieu of notice, made to you satisfies the requirements in paragraphs 82-130(1)(a) and (b). Based on facts provided the Commissioner accepts the payment satisfies these requirements.

Section 82-135 excludes certain payments from being employment termination payments. This includes payments for unused annual and long service leave, superannuation benefits and the tax-free part of a genuine redundancy payment.

Consequently, the amounts you received for unused annual leave and unused long service leave are excluded from being employment termination payments. These payments are taxable in accordance with Subdivisions 83-A and 83-B of the ITAA 1997 respectively.

As you were made redundant by your employer, any tax-free genuine redundancy payment will also be excluded.

Genuine redundancy payment

A payment made to an employee, after 30 June 2007, is a genuine redundancy payment (GRP) if it satisfies all criteria set out in section 83-175 of the ITAA 1997.  This section states:

(1) A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee's position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of dismissal.

(2) A genuine redundancy payment must satisfy the following conditions:

(a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach the age or complete the period of service (as the case may be);

(b) if the dismissal was not at arm's length - the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's length;

(c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after dismissal.

(3) However, a genuine redundancy payment does not include any part of a payment that was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later time.

Payments not covered

(4) A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

Based on the facts provided, it is accepted that your employment was terminated by the Company due to retrenchment, and that you are under the age of 65.

Further, with the exception discussed below, all the requirements of subsection 83-175 of the ITAA 1997 have been met by these payments.

However, the amount you received for unused sick leave is the same as you would have normally received on termination of employment. Consequently, the requirements of subsection 83-175(1) of the ITAA 1997 are not satisfied in respect of this payment.

The Commissioner accepts that the termination payment includes a genuine redundancy payment under section 83-175 of the ITAA 1997.

Tax-free part of a genuine redundancy payment

Under Section 83-170 of the ITAA 1997 when there is a genuine redundancy, part of the payment may be tax-free. The tax-free amount is calculated by a formula under subsection (3):

Base amount + [Service amount x Years of service]

For the 2010-11 income year:

Base amount means $8,126;

Service amount means $4,064; and

Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates.

Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is not assessable income and is not exempt income. This amount is not greater than the redundancy amount you received in respect of your severance pay. Any amount in excess of the tax-free amount is taxed as an employment termination payment.

The employment termination payment constitutes a life benefit termination payment

Subsections 82-130(1) and 82-130(2) of the ITAA 1997, provide that where an employment termination payment is made during the life of a taxpayer, the payment is known as a life benefit termination payment (LBTP).

Subsection 82-10(3) of the ITAA 1997 specifies that the taxable component is subject to tax, depending on the recipient's age.

It should be noted that, 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:

Because the payment is an employment termination payment to which subparagraph 82-130(1)(a)(i) of the ITAA 1997 applies, the payment constitutes a LBTP within the meaning of subsection 82-130(2) of the ITAA 1997.

Transitional termination payment

An employment termination payment made after 1 July 2007 can no longer be rolled over into a complying superannuation fund, unless the payment constitutes 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 ITTPA 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 issue for consideration is whether the payment made to you satisfies these requirements.

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).

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, law, instrument or agreement 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 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.

Further to the above, it should be noted that the Commissioner considers a payment made under a contract 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 a contract in place just before 10 May 2006. It should also be noted that the Commissioner maintains this position regardless of whether the payment is made under a written contract, a law of the Commonwealth, a State, a Territory or another country, an instrument under such a law or a collective agreement within the meaning of the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009.

In this case, the Company is currently bound by an Enterprise Agreement (the Agreement).

Prior to 10 May 2006, you were party to a written employment contract (the Contract) with the Company. This employment contract made the Agreement binding upon you as an employee of the Company. The Agreement contains a clause that provides for payments to be made in the event of redundancy of positions covered by the Agreement, and also provides the basis for calculating this redundancy payment.

Whilst the Agreement does not specify the amount of the payment, it does provide a way to work out a specific amount of the payment (subsections 82-10(3) and (4) of the IT(TP)A.

You and the Company were parties to a variation to the Contract after 9 May2006. However, the conditions of your employment remained unchanged with the exception of a change to your position title and total employment cost.

The Agreement refers to a method of calculating employees' entitlements, which can be objectively determined, and the variation did not alter this formula for calculating employee entitlements on termination of employment.

Since the payment in respect of your severance pay, sick leave and in lieu of notice to be made to you by the Company in the 2010-11 income year was:

· under a written contract which came in force before 10 May 2006, and

· has a way to work out a specific amount of the payment,

the requirements under section 82-10 of the IT(TP)A have been satisfied.

Accordingly, the amount of the proposed genuine redundancy payment in excess of the tax-free amount determined under subsection 83-170(3) of the ITAA 1997 will be a transitional termination payment under section 82-10 of the IT(TP)A. As a result, you are able to make a choice to direct any payment in excess of your tax-free amount be paid into a complying superannuation fund, or to purchase a superannuation annuity before the payment is made.

The taxable component of any transitional employment termination payment not rolled over is subject to tax, depending on the person's age, as follows:

Taxpayer's age	Tax on taxable component of transitional employment termination payments from 1 July 2010
Under preservation age on the last day of the income year in which the payment is made.	Ÿ Up to $1 million - taxed at a maximum rate of 30% plus Medicare levy. Ÿ Amount over $1 million - taxed at top marginal tax rate plus Medicare levy.
Preservation age or over on the last day of the income year in which the payment is made.	Ÿ Up to $160,000 - taxed at a maximum rate of 15% plus Medicare levy. Ÿ Amount over $160,000 and up to $1 million - taxed at a maximum rate of 30% plus Medicare levy. Ÿ Amount over $1 million - taxed at top marginal tax rate plus Medicare levy.

The performance bonus reward incentive scheme (the incentive scheme)

The question also arises as to whether the incentive payment under the incentive scheme is a transitional termination payment.

Payment is an employment termination payment

Under normal circumstances the incentive payment under the incentive scheme would be made annually, on a specific date, to the participating employees. The Company confirmed that if you resigned of your own accord prior to the date the incentive payment is due and payable you would not entitled to the payment. The Company made a decision that all employees being made redundant as part of the Company restructure would be paid out a proportion of the incentive payment under the incentive scheme.

Your employment was terminated in the 2010-11 income year due to retrenchment. The incentive payment did follow on as an effect or result of the termination of your employment. It is considered that the incentive payment was made in consequence of the termination of your employment. For the reasons discussed above concerning your severance pay, sick leave and payment in lieu of notice, the Commissioner accepts the incentive payment made under the incentive scheme is an employment termination payment.

The requirement set out in paragraph 82-130(1)(c) of the ITAA 1997

One of these conditions specified in paragraph 82-130(1)(c) of the ITAA 1997 is that the incentive payment is not a payment mentioned in section 82-135 of the ITAA 1997.

Section 82-135 of the ITAA 1997 includes the tax-free part of a genuine redundancy payment.

Your incentive payment is added to the other genuine redundancy amounts you received. As explained above, your tax-free redundancy amount is less than the total of your redundancy payments.

As all the conditions under section 82-130(1) of the ITAA 1997 are satisfied. Accordingly, the incentive payment is life benefit termination payment.

Transitional termination payment and PBRIS

A payment is a transitional termination payment if it is a life benefit termination payment (LBTP - explained above) received between 1 July 2007 and 30 June 2012 under a written contract, an Australian or foreign law or an instrument under such a law or a workplace agreement under the Workplace Relations Act 1996.

Further the contract, law or instrument under which the entitlement was provided must have been in force before 10 May 2006. It must also specify the amount of the payment or a way to work out the specific amount of the payment.

In your particular case, the proposal incentive payment to be received by you will be determined by a formula in place prior to 10 May 2006. However, the formula is subject to annual appraisals and the performance of the company.

The amount to be paid under the incentive scheme is determined on a year to year basis and cannot be ascertained with certainty until the bonus year. This is because the managers of the Company have the ability to add a discretionary amount to the standard incentive payment in any year to determine the final payout of the entitlement.

Further, the incentive payments are not automatic as they must be approved by the Company's CEO and/or General Manager.

It can also be seen that the incentive payment under the incentive scheme, in force as at 9 May 2006, you would not have had an entitlement to any payment under these circumstances.

Consequently, the incentive payment is not a transitional termination payment as the requirements under section 82-10 of the IT(TP)A have not been satisfied the incentive payment to be made to you is not a transitional termination payment as defined in section 82-10 of the IT(TP)A.

Accordingly, no part of the incentive payment is a transitional termination payment and you cannot direct this amount into a complying superannuation fund.

Subsection 82-10(6) of the IT(TP)A defines a transitional termination payment to be that part of a life benefit termination payment that satisfies Division 82 of the IT(TP)A. Consequently, the fact that this part of your employment termination payment is not a transitional termination payment will not preclude any other part of the payment you receive from being a transitional termination payment.

Directed termination payment

A payment is a directed termination payment if an individual chooses within 30 days of receiving a pre payment statement from the payer to direct a transitional termination payment or part of it on the individual's behalf to a complying superannuation plan or to purchase a superannuation annuity.

In this case, as determined above, the incentive payment is not a transitional termination payment and therefore it cannot be a directed termination payment as required under section 82-10F of the ITTPA.

As the proposed incentive payment is not a transitional termination payment you cannot rollover the payment into a complying superannuation fund as a directed termination payment.

Although the incentive payment cannot be rolled over as a directed termination payment you can still make the payment into a complying superannuation fund as a non-concessional contribution.