Edited version of private ruling

Authorisation Number: 1011668410807

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Ruling

Subject: Transitional termination payment

Question

Does any part of the severance payment made to you by your former employer during the 2009-10 income year meet the requirements to be considered to be a transitional termination payment (TTP)?

Answer

No

This ruling applies for the following period:

1 July 2010 to 30 June 2011

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 a company (Entity 1) in the early 1990s.

Prior to the merger between Entity 1 and another company (Entity 2) in the 2008-09 income year, you held a senior managerial position with Entity 1. Following the merger you were offered a different senior managerial position in a letter of offer which you described as a replacement employment contract that commenced during the 2008-09 income year.

It is noted the letter of offer also included the following details:

You will continue to be employed by Entity 1.

In your role of new senior managerial position of Entity 1 you may be required to assist with work from the broader Entity 2 Group. As such, while you remain employed by your current employer, you will be seconded for the portion of the work that you do for the Entity 2 Group. The secondment arrangement is a requirement of our corporate structure following the merger.

During the secondment the employment polices of your employer would continue to apply to you. Some additional policies may also apply, for example, compliance policies related to the portion of work that you do on secondment.

All other terms and conditions of your employment, including redundancy, continue to apply, as varied by this letter. This includes the following notice of termination arrangements:

Entity 1 may terminate your employment at any time for any reason by giving six months written notice of termination;

You may terminate your Employment at any time for any reason by giving one month written notice of termination.

You advised that Entity 1 had a redundancy policy (the Entity 1 Redundancy Policy) in place at all times which applied to yourself.

You also state that the terms and conditions regarding the notice period under your replacement contract was consistent with the Entity 1 Redundancy Policy.

Under the Entity 1 Redundancy Policy an employee is entitled to a severance payment of:

(a) a number of weeks' salary in lieu of notice;

(b) a number of weeks for the first full year of service; and

(c) several weeks' salary for each subsequent year of part year of continuous service;

capped at a maximum number of weeks' salary.

In addition, there is a provision for an additional week's salary for every year over age 45.

The Entity 1 Redundancy Policy included provision for an extra notice period for some senior employees with reference to an earlier merger that occurred between Entity 1 and another entity in an earlier income year.

In the 2009-10 income year you were advised by Entity 1 that your position had become redundant as a result of restructuring within the area in which you worked.

You were further informed that redeployment opportunities within Entity 1 had been considered and that suitable employment that matched your skills, abilities experience was not able to be located. As a result, your employment was terminated at that date.

Your were advised by letter that a severance benefit, calculated in terms of the Entity's redundancy policy together with your leave entitlements would be payable. Included with the letter was a spreadsheet headed 'Retrenchment Payment Schedule' outlining the amounts of your severance payment.

Among the details contained in the Retrenchment Payment Schedule it is noted that it states that your legal employer was Entity 2 and that the severance payment was calculated under an Entity 2 collective agreement.

Following this, you received your severance payment from Entity 2 and who advised that the payment was calculated in accordance with Entity 2's redundancy policy and taxed as a non-transitional employment termination payment.

Entity 2 has subsequently provided you with further confirmation that :

The reference to the Entity 2 collective agreement in the retrenchment calculation spreadsheet is a reference to the Entity 2 Enterprise Agreement).

Their records indicate that the only written contract of employment on file is your first employment contract prior to the merger between Entity 2 and Entity 1.

As you changed roles a number of times during your employment service period, this first contract was no longer applicable.

They have no record of any new or updated employment contract reflecting any of the subsequent roles you performed other than documents such as remuneration review letters. The most recent being the replacement contract in the 2008-09 income year following the merger of Entity 2 and Entity 1.

Your severance payment was calculated in accordance with Entity 2's redundancy policy and not under the Entity 1 Redundancy Policy you state as applicable to you.

They are unaware of the Entity 1 Redundancy Policy you state as applicable to you and therefore unable to determine whether it has been updated, replaced or abolished after 9 May 2006.

They have no record of the Entity 1 Redundancy Policy document being in existence and therefore are not in a position to talk about a changed policy.

The only factual information they can give you is that the formula that your severance payment was calculated on was not in accordance with the Entity 1 Redundancy Policy document, a copy of which you provided to them.

You were given six months notice as this was what was stipulated in your replacement employment contract in the 2008-09 income year.

They did not consider your severance payment as a transitional termination payment as it was their position that you did not have a written contract as at 9 May 2006 that reflected the then current role which you held.

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 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)

Income Tax (Transitional Provisions) Act 1997 Subsection 82-10(4)

Income Tax (Transitional Provisions) Act 1997 Subsection 82-10(5)

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

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

The severance payment made to you during the 2010-11 income year is an employment termination payment. However the payment does not meet the requirements to be a transitional termination payment.

The employment termination payment was not a payment received by you because you were entitled to it under a written contract, a law, an instrument under a law, a collective agreement or an Australian workplace agreement (AWA) that came into Detailed reasoning

force just before 10 May 2006.

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.

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 you received is paid in consequence of the termination of your employment with Entity 1. Thus, subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

It is also evident from the details of the dates of your termination and payment that the 12 month requirement under paragraph 82-130(1)(b) of the ITAA 1997 has also been 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 case, 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 reduced by the tax-free part of the severance payment.

Transitional termination payment

Some employment termination payments made between 1 July 2007 and 30 June 2012 are subject to transitional arrangements. Payments made under these arrangements (transitional termination payments) attract tax concessions designed to broadly mirror arrangements prior to 1 July 2007, including the ability to direct these amounts into superannuation.

To qualify as a transitional termination payment, the payment must be a life benefit termination payment (as defined in subsection 82-130(2) of the ITAA 1997) that meets the requirements of section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA).

Section 82-10 of the ITTPA states:

(1) 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.

(2) However, this Division does not apply in relation to a life benefit termination payment received by you on or after 1 July 2012 (except to the extent provided by Subdivision 82 - E.

(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.

(5) To the extent that this Division applies to a life benefit termination payment, Subdivision 82-A of the Income Tax Assessment Act 1997 does not apply to the payment (subject to Subdivision 82-E of this Act).

(6) In this Division:

transitional termination payment means:

(a) a life benefit termination payment to which this Division applies; or

(b) if this Division applies to only part of a life benefit termination payment - that part of the payment.

On the basis of the information as provided, it can be established (and has been confirmed to you by Entity 2) that the severance payment you received was calculated under the Entity 2 Enterprise Agreement and not in accordance with the Entity 1 Redundancy Policy that you stated as being applicable to you.

Therefore the first issue for consideration is whether the severance payment made to you in accordance with the Entity 2 Enterprise Agreement satisfies the requirement of being an entitlement under a written contract or 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.

Entitlement under a written contract

The explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 which introduced section 82-10 of the ITTPA 1997 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 your case, the severance payment was made to you in accordance with the Entity 2 Enterprise Agreement which is a collective agreement within the meaning of the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009. However, as you would not have been covered by the Entity 2 Enterprise Agreement as at 9 May 2006, the severance payment would not have been able to be determined as at 9 May 2006 and subsections 82-10(3) and 82-10(4) of the ITTPA would not be satisfied.

Whilst the Entity 1 Redundancy Policy you described provided entitlement to a severance payment on redundancy that was able to be determined as at 9 May 2006, your entitlement to the actual severance payment made to you was calculated in accordance with the Entity 2 Enterprise Agreement under which you were not covered as at 9 May 2006.

Further, your appointment in the new senior managerial position arose as a result of the letter to you confirming the terms and conditions of your appointment and to which you refer to as your replacement employment contract. Consequently, it cannot be said that the severance payment made to you was received because of your entitlement to it under a written contract or agreement in force just before 10 May 2006 as required under subsection 82-10(1) of the ITTPA.

Alternatively, even if it were accepted that your replacement employment contract was merely a variation of your employment contract that existed prior to your replacement contract, this does not change the fact that your severance payment was calculated in accordance with the Entity 2 Enterprise Agreement and that, as at 9 May 2006, you were not covered by the Entity 2 Enterprise Agreement.

Accordingly the severance payment 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 less the tax-free part of a genuine redundancy payment) is not transitional termination payment.