Edited version of private ruling

Authorisation Number: 1011679419645

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Ruling

Subject: Transitional termination payment

Question 1

Does any part of the lump sum gratuity payment made to you during the recent income year meet the requirements to be considered a transitional termination payment?

Answer

No

Question 2

Does any part of the lump sum gratuity payment meet the requirements to qualify as a directed

termination payment?

Answer

No

This ruling applies for the following period:

1 July 2009 to 30 June 2010

The scheme commences on:

1 July 2009

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 are under age 55.

Your service with an entity (Entity 1) commenced a considerable time ago and ceased in the

recent income year.

You became entitled to a lump sum (the lump sum gratuity payment).

Entity 1 did not provide you with a pre-payment statement. As a result you were denied the opportunity to make a choice to make a directed termination payment (DTP) of the whole amount of the payment to a complying superannuation plan.

It was always your intention to make a DTP to a complying superannuation fund and this is the basis of the discussions you had with Entity 1.

You deposited the net amount of the payment (less tax withheld) into the bank account of your superannuation fund following receipt of the payment from Entity 1.

A PAYG payment summary - employment termination payment for the relevant year ending was subsequently provided to you by the service company of Entity 1 (Entity 2). It included details which indicated it was a transitional termination payment.

You provided a copy of a partnership agreement with Entity 1( Agreement 1) which you advised was the contract that was current immediately prior to the termination of your service with Entity 1 and a copy of second partnership agreement (Agreement 2) that was current as at 9 May 2006.

Agreement 1 indicated:

· You were a partner in a partnership with Entity 1.

· You were party to Agreement 1 which came into effect during the recent income year.

· The partners in Entity 1 comprise a partnership of persons carrying on a business.

· Agreement 1 superseded Agreement 2.

You state that you retired from Entity 1 pursuant to a retirement clause of Agreement 1 which provided for an amount payable as a termination payment.

You state that this amount was paid by Entity 2, being the employer of the partners and staff of Entity 1.

An examination of Agreement 2 shows that the retirement clause in Agreement 2 (retirement Clause in Agreement 2) largely mirrors the provisions contained in the retirement Clause in Agreement 1.

You were also employed in the service trust of Entity 1 (Entity 3).

Your duties provided to employees of Entity 3 were varied and included general administrative duties that were relevant to the ongoing activities of Entity 3.

Entity 3 has confirmed that you were an employee until your employment ceased on the date you terminated service with Entity 3.

In consideration of the services that have been provided by yourself as an employee of Entity 3, you advise the remuneration paid each year as a wage has been declared as assessable income in your tax return each year.

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 Subparagraph 82-130(1)(a)(i).

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)

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

Income tax (Transitional Provisions) Act 1997 Subsection 82-10E(1)

Income tax (Transitional Provisions) Act 1997 Subsection 82-10E(2)

Income tax (Transitional Provisions) Act 1997 Subsection 82-10E(3)

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

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

Income tax (Transitional Provisions) Act 1997 Subsection 82-10F(1)

Income tax (Transitional Provisions) Act 1997 Subsection 82-10F(2)

Income tax (Transitional Provisions) Act 1997 Subsection 82-10F(3)

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

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 lump sum gratuity payment received by you from Entity 1 was not made in consequence of the termination of employment. The payment was made in consequence of the termination of your services as a partner in the partnership with Entity 1.

Therefore, the payment is not an employment termination payment and does not meet the requirements to be a transitional termination payment. Consequently it cannot be a directed termination payment.

Even if it were to be accepted that the payment was an employment termination payment (which it is not), the payment was made under a written contract entered into on or after 10 May 2006. Therefore, the payment does not meet the requirements to be a transitional termination payment. Consequently it cannot be a directed termination payment.

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.

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.

In your case, on the basis of the information provided, it can be established that although you were also an employee of Entity 3 in addition to being a partner in partnership with Entity 1, the lump sum gratuity payment that you received pursuant to the retirement Clause of Agreement 1 from Entity 1 was paid to you in consequence of your retirement as a partner who has achieved a certain number years of service as a partner in the partnership.

You have stated that part of the termination payment paid is based upon the number of years you were employed by Entity 3 and was an amount paid on a consistent basis with all other retired employees of Entity 3. However, it is not evident in the retirement Clause of Agreement 1 that any part of the lump sum entitlement that you received has been determined on the basis of your service as an employee of any entity associated with the partnership (including Entity 3). It is noted that the retirement Clause of Agreement 1 consistently makes reference to service as a partner and not to service as an employee.

You also stated that in terms of how the entitlements calculated under the retirement Clause of Agreement 1 were paid to you by Entity 3, you note Agreement 1 describes the contractual relationship between Entity 1 (and their associated entities) and each partner.

It is noted a particular clause in Agreement 1 (Clause X in Agreement 1) does refer to certain practice and service entities.

However, it is not evident in the retirement Clause in Agreement 1 or Clause X in Agreement 1 that any part of the lump sum gratuity payment or the method in which it is to be calculated is in respect of any period of service that a partner may have had as an employee of a service entity of the partnership.

A subclause of the retirement Clause in Agreement 1 outlines the method for calculating the retirement benefit that a partner becomes entitled to upon their retirement from the partnership and does not make mention of a component referrable to the employment service a partner may also have with any associated entities.

It can be seen that the particular subclause in Agreement 1 provides for an amount payable on the retirement of a partner. You have also stated, that subclause was included as an update from the previous agreement to ensure consistency with previous retiring partners and simply provides for a pro rata of entitlements based on years of service as a partner.

Therefore, it can be concluded the lump sum gratuity payment has been paid to you pursuant to the retirement Clause in Agreement 1 as a retiring partner and is an entitlement calculated based on years of service as a partner. It cannot be evidenced as a payment in consequence of the termination of your employment as an employee of Entity 3.

According to the statutory definitions in State and Territory partnership law, a partnership is the relationship between parties carrying on a business in common with a view to profit. Australian courts have established that a partnership is not a separate and distinct legal entity from the persons who comprise it.

Following the general law principle that a partnership is not a separate legal entity, a partnership cannot contract with one of its members. It has been established in the court decision in Ellis v. Joseph Ellis & Co. [1905] 1 KB 324, that a partner cannot be an employee of a partnership. Accordingly, a partnership cannot as such enter into a contract of employment with a partner and a partner cannot be the employee of the remaining partners, since the same person cannot be both master and servant.

Generally where a partnership agreement is put in writing, key provisions in the terms may include provisions for the retirement of any of the partners. Such a lump sum gratuity received by a partner on termination of a partnership agreement or when a partnership is dissolved is not considered an employment termination payment as defined in subsection 82-130(1) of the ITAA 1997.

It is an amount paid to the partner pursuant to terms in the partnership agreement and under specific circumstances such as an amount payable to a retiring partner as agreed by persons in the partnership who are parties to the partnership agreement.

In Taxation, Commissioner of (Cth) v. Sealy (1987) 22 IR 388; (1987) 78 ALR 387; (1987) 19 ATR 582; (1987) 87 ATC 5076 (Sealy), it was held that a managing partner in a partnership also occupied an office. The Federal court dismissed an appeal by the Commissioner from the decision in Tribunal Case 64 (1987) 18 ATR 3449; (1987) 87 ATC 485.

The taxpayer was a minor partner in a firm of graziers and was the full-time manager of the firm's grazing properties. The taxpayer was originally an employee of the firm and after becoming a partner continued to draw an annual salary over and above his 5.3% share of the partnership profits. During the 1980 income year, the firm sold both of its grazing properties and the partnership was wound up. In the course of the winding up the taxpayer received a lump sum in lieu of long service leave for 15 years he had been with the firm.

The Commissioner treated the lump sum as a fully assessable distribution of net partnership income. The taxpayer objected on the ground that it was a long service leave payment entitled to concessional treatment under now repealed section 26AD of the Income Tax Assessment Act 1936 (ITAA 1936). The Administrative Appeals Tribunal (AAT) upheld the taxpayer's objection. The AAT viewed that the firm was under a statutory obligation to provide the taxpayer with long service leave because he was an 'employee' within the extended definition in section 19 of the Industrial and Conciliation Arbitration Act (Qld).

The Commissioner appealed to the Federal Court and the appeal was dismissed. The Federal Court found the AAT view (that the firm was under a statutory obligation to provide the taxpayer with long service leave because he was an 'employee') was incorrect. It was a payment in respect of unused long service leave, being leave of the kind mentioned in paragraph 26AD(8)(c) of the ITAA 1936 (now repealed). The sum in question was paid in consequence of termination of the taxpayer's office, namely as managing partner of the grazing partnership.

However, although you were a partner in Entity 1 and you were also an employee of Entity 3, it is considered the facts of your case can be distinguished from Sealy. The lump sum gratuity payment you received was not in consequence of the termination of your employment with Entity 3 but was in consequence of your retirement as a partner in Entity 1 pursuant to the retirement Clause in Agreement 1.

Consequently, it fails the requirement in paragraph 82-130(1)(a)(i) of the ITAA 1997 and is therefore consequently not a life benefit termination payment as defined in subsection 82-130(2) of the ITAA 1997.

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 (TTP), 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 in Division 82 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA).

The requirements in section 82-10 of the ITTPA include:

(a) the payment is received by you because you are entitled to it under a written contract, a law, 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; and

(c) Division 82 applies 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.

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 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)]

It is noted that Agreement 2 (as amended) came into effect during a previous income year and has been superseded by Agreement 1 which took effect during the more recent income year.

Although you would have been covered by Agreement 2 as at 9 May 2006 if you had retired as a partner at that time, the fact remains that your payment was paid to you pursuant to the retirement Clause in Agreement 1. Your entitlement to the actual payment received was calculated in accordance with the retirement Clause in Agreement 1 and not under the retirement Clause of Agreement 2.

While Agreement 2 provided an entitlement that was able to be determined as at 9 May 2006, your entitlement to the actual payment made was calculated in accordance with the retirement Clause in Agreement 1 under which you were not covered as at 9 May 2006.

Consequently, it cannot be said that the payment made to you was received because of an entitlement that is provided for under a written contract or agreement as in force just before 10 May 2006 as required under subsection 82-10(1) of the ITTPA.

Even if it were accepted there is a termination of employment (which it is not), the Commissioner's view in ATO ID 2007/163 is clear in that any employment termination payments made under a workplace agreement, entered into on or after 10 May 2006, are not transitional payments, even if the terms under which the payments are made are the same as the terms under a workplace agreement in place just before 10 May 2006.

Notwithstanding the entitlements as a retiring partner are the same under both the agreement in force just before 10 May 2006 (the retirement Clause in Agreement 2) and the new agreement entered into after 10 May 2006 (the retirement Clause in Agreement 1), the lump sum gratuity payment you received was paid under the relevant provisions of the new agreement that was first entered into on or after 10 May 2006, that is, it was not paid under Agreement 2.

Accordingly the payment does not meet the requirements of section 82-10 of the ITTPA to be a TTP.

As the lump sum gratuity payment is not considered a TTP it cannot be a directed termination payment (DTP).

Further, even if it were to be accepted that the payment constituted a TTP (which it is not), it would still not be a DTP. This is because in order for the payment to be a DTP, it needs to be directed by the payer to a complying superannuation plan in accordance with section 82-10F of the ITTPA. There are no provisions in the ITTPA or the ITAA 1997 that would allow the Commissioner to treat the payment as if it were a DTP.