Edited version of private ruling

Authorisation Number: 1011764467677

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Ruling

Subject: Employment termination payment

Is any part of the termination payment received by you on termination of employment a transitional termination payment as defined in section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA)?

Answer:

No

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You are over 55 years of age but under the age of 65.

You commenced employment with the employer over ten years ago and have been continuously employed by the employer to the present time.

During employment, you and the employer were parties to a written employment contract (the contract) entered during 20XX. You have provided a copy of the contract to the Commissioner of Taxation.

You state that the contract remains unchanged.

The contract contains a specific policy to the payment of redundancy entitlements. On redundancy, you will be entitled to a redundancy package but capped at a maximum of X weeks. The contract also stated that any redundancy package provided for the corporation will be varied or replaced from time to time.

You have been informed by the employer that your position will be declared redundant and that your last employment date will be on a specific date in the 2010-11 income year.

Your employer also provided you with a copy of its latest Redundancy and Redeployment Policy, the 2009 Redundancy Policy.

Your employer confirmed that upon termination of your employment, you will be paid a redundancy payment of a maximum number of Y weeks in accordance with the terms of the 2009 Redundancy Policy.

You accepted the offer of the voluntary redundancy and returned the signed 'Employee's Response' form to the employer.

The proposed payment amounts to be made to you on the termination of employment include:

· redundancy payment;

· annual leave;

· Long service leave (after 15 August 1978); and

· Long service leave (before 15 August 1978)

This ruling is given on the basis of the facts stated in the description of the scheme as set out above. Any material variation from these facts (including any matters not stated in the description above and any departure from these facts) will mean that the ruling will have no effect. No entity will then be able to rely on this ruling as the Commissioner will consider that the scheme has been implemented in a way that is materially different from the scheme described.

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 83-170

Income tax Assessment Act 1997 Section 83-175

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(2)

Income Tax (Transitional Provisions) Act 1997 subsection 82-10(3)

Reasons for decision

Summary

The payment you will receive from the termination of your 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.

Accordingly, the amount in excess of the tax-free limit of the genuine redundancy payment to be made to you is not a transitional termination payment.

The termination payment in excess of the tax-free limit of the genuine redundancy payment is a life benefit employment termination payment.

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

Detail reasoning

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 to be received by you satisfies the above requirements. Based on facts provided the Commissioner accepts the payment is an employment termination payment.

The 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).

In particular, 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.

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 arms 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

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 will be terminated during the 2010-11 income year as a result of the redundancy of your position, and that you are under the age of 65.

Accordingly, 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; and

· Service amount means $4,064.

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

The amount worked out from the above formula is the tax-free amount of the payment you received and is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997. Any amount in excess of the tax-free amount will be a LBTP.

Subsection 82-10(2) of the ITAA 1997 provides that the taxable component of the LBTP is assessable income. Subsection 82-10(3) of the ITAA 1997 specifies that taxable component is subject to tax, depending on the recipient's age.

Transitional termination payment

A life benefit termination payment made between 1 July 2007 and 30 June 2012 may be 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 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 issue for consideration is whether the payment made to you 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).

As noted above, the legislation itself is quite specific, the payment will be a transitional termination payment to the extent the pre 10 May 2006 contract, law, instrument or agreement specifies an amount of the payment, or a method or formula by which a specific amount of the payment can be determined.

In this case, your redundancy entitlements and the formulas to calculate them are stated in your employment contract.

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

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, you have a written employment contract in place prior to 10 May 2006. You state that the contract remains unchanged. The contract contains a specific policy to the payment of redundancy entitlements. This redundancy policy is incorporated into the employment relationship and forms part of the matrix of the overall contract of employment between you and the employer.

The contract stipulated that on redundancy you will be entitled to a redundancy package of X weeks. The contract also stated that any redundancy package provided for the corporation will be varied or replaced from time to time. In fact, the employer has updated their redundancy and redeployment policy on or after 9 May 2006. The updated redundancy policy provides for your total entitlement in the event you are retrenched by reason of redundancy and no offer of alternative employment is available is Y weeks.

Irrespective of whether your contract remains unchanged it is the fact that the redundancy policy attached to the contract has changed. The fact that your written contract contains a specific reference to the payment of redundancy entitlements does not change the fact that your entitlement to the redundancy payment will be calculated in accordance with the updated redundancy policy and not the clause mentioned in your employment contract.

This is because the employer did not work out the specific amount of the payment as provided for by the agreement as in force just before 10 May 2006. The employer will be making the payment in accordance with the terms of an updated redundancy policy (i.e. Y weeks) which came into force on or after 10 May 2006.

Therefore, the entitlement to the payment to be received by you is the result of the updated redundancy policy and not the employment contract.

In addition, you signed the agreement formally acknowledging acceptance of the offer of the redundancy package. You agreed that your redundancy entitlement shall be made under the relevant provisions of the updated redundancy policy entered into on or after 9 May 2006. Hence, as the payment to be received is not made under an agreement in force just before 10 May 2006 it is not a transitional termination payment.

Consequently, the amount in excess of the tax- free amount of the genuine redundancy payment to be received by you under the updated redundancy policy is not a transitional termination payment as defined in section 82-10 of the IT(TP)A.

Pro-rata of the redundancy entitlement

As previously quoted, subsection 82-10 of the IT(TP)A refers to 'the payment' not part of a payment. Furthermore, under subsection 83-175(1) of the ITAA 1997 a genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because of genuine redundancy, as exceeds the amount that could be reasonably be expected to be received by the employee in consequence of the voluntary termination of the employees employment at the time of the dismissal.

The starting point of subsection 83-175(1) of the ITAA 1997 also refers to a payment not part of the payment made in the circumstances of redundancy.

It can be seen from the above legislation the payment cannot be divisible into parts unless the contract or the policy specifies a number of separate payments are to be made.

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 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 payment to be received by you is not a transitional termination payment you cannot rollover the payment into a superannuation fund as a directed termination payment.