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Ruling

Subject: Transitional termination payment

Question 1

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

Answer:

No.

Question 2

Can any part of your client's payment on termination of employment be treated as a directed termination payment under section 82-10F of the ITTPA?

Answer:

No.

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If the 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.

Your client, who is less than 60 years of age, commenced employment with the Employer over 10 years ago.

Your client signed a Deed of Release (the Deed) wherein your client agreed to terminate employment with the Employer during the 2011-12 income year.

Your client's employment was terminated as your client's position was made genuinely redundant.

In a letter from the Employer, and in the Deed, it was agreed that your client would receive a gross payment (the payment) which included all outstanding entitlements (including unused annual and long service leave) and severance payments.

The redundancy component of the payment, as per a Schedule (the Schedule) attached to the Deed, showed how it was calculated and that the amount excess of the tax-free threshold was treated as an employment termination payment (ETP).

The ETP relates wholly to a post-June 1983 component and tax withheld was calculated at a rate of 31.5%.

In a Workplace Agreement (the 2006 Agreement), which came into effect during the 2006-07 income year, it states, amongst other matters:

· the agreement is made pursuant to section 328 of the Workplace Relations Act 1996;

· it has a nominal expiry date;

· the parties which are bound by the agreement include your client and the Employer;

· the agreement replaces in full the previous workplace agreement; and

· clauses which relate to redundancy provisions and how payments under the provisions are calculated.

In the 2010-11 income year another Workplace Agreement (the 2010 Agreement) was approved under the Fair Work Act 2009.

The 2010 Agreement, stated amongst other matters:

· the agreement takes effect from the date of approval;

· it has a nominal expiry date;

· the parties which are bound by the agreement include your client and the Employer;

· the agreement replaces in full the 2006 Agreement; and

· clauses which relate to redundancy provisions and how payments under the provisions are calculated.

In relation to redundancy provisions, the clauses in the 2010 Agreement are, apart from some formatting, the same as those found in the 2006 Agreement.

The Employer has no separate written severance policies to those found in the 2006 and 2010 Agreements.

Your client intends to direct the ETP to go to a complying superannuation fund after the Private Ruling is provided.

The ETP will be received by your client within 12 months of the termination of employment date.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 82-10(2).

Income Tax Assessment Act 1997 Subsection 82-10(3).

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 82-130(4)(a)

Income Tax Assessment Act 1997 subsection 82-130(7)

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).

Reasons for decision

Summary

The payment your client receives 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.

Accordingly, the amount in excess of the tax-free limit of the genuine redundancy payment your client receives is not a transitional termination payment.

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

As the termination 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.

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 redundancy payment is paid in consequence of the termination of your client's employment with the Employer. Thus, subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

As your client's employment was terminated during the 2011-12 income year, and your client will receive the payment within 12 months of termination, it is considered the 12 month requirement under paragraph 82-130(1)(b) of the ITAA 1997 will be 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 client's case, the total redundancy 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 the amount in excess of the tax-free amount.

It should be noted that the amount in excess of the tax-free amount is a life benefit termination payment (LBTP) and subsection 82-10(2) of the ITAA 1997 provides that the taxable component of the LBTP is assessable income. Further, subsection 82-10(3) specifies that the taxable component, in this case the amount excess of the tax-free amount, is subject to tax depending on the recipient's age.

Transitional termination payment

A LBTP 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 ITTPA 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. (emphasis added)

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 first issue for consideration is whether the payment made to the employee satisfies the requirement of being an entitlement under a written contract, law or agreement.

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 is entitled to a payment, a life benefit termination payment, in accordance with the redundancy clauses in the 2010 Agreement which is a collective agreement within the meaning of the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009.

Contract in force before 10 May 2006

Paragraph 82-10(1)(b) of the ITTPA requires that 'the entitlement is provided for under that contract, law, instrument or agreement as in force just before 10 May 2006' [emphasis added]. Furthermore, subsection 82-10(3) of the ITTPA 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.

In this case the facts show the method used to determine the payment made to your client under the 2010 Agreement is the same as that which existed under a previous Agreement, that is, the 2006 Agreement.

Notwithstanding the same method of calculating entitlements are present in the 2006 and 2010 Agreements it must be shown, in order to satisfy paragraph 82-10(1)(b) and subsection 82-10(3) of the ITTPA, that the Agreement under which the payment is made was in force just before 10 May 2006.

In the case of the 2006 Agreement, the facts show it was not in force prior to 10 May 2006 as the Agreement only came into effect in the 2006-07 income year.

Furthermore, the 2006 Agreement was only intended to have a limited period of operation as it stated a nominal expiry date. As, the facts show, the 2006 Agreement did come to an end when the 2010 Agreement was approved.

Though the entitlements in the 2010 Agreement in relation to redundancy were the same as those in the 2006 Agreement, and the other terms and conditions in the Agreements may have been the same, it should be noted that the 2010 Agreement stated the agreement replaces in full the 2006 Agreement.

In view of the above it is evident that at the time of your client's termination of employment that the entitlements received by your client were not under the 2006 Agreement.

It should also be noted that your client entered into a Deed of Release (the Deed) in relation to the termination of employment. Consequently, it could also be argued that the payment was made under the Deed and not the agreement. Under the Deed, your client was entitled to receive the same payments specified under both the 2006 and the 2010 Agreements.

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 workplace agreement within the meaning of the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009.

In this case, however, it is not necessary to determine under which Agreement or Deed your client received the employment termination payment. The facts show that neither the 2006 Agreement, the 2010 Agreement or the Deed were in force just before 10 May 2006. They all came into force on various dates after 10 May 2006.

Consequently, the requirement in paragraph 82-10(1)(b) of the ITTPA is not satisfied and the payment your client receives in relation to the termination of employment from the Employer is not a transitional termination payment under section 82-10 of the ITTPA.

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 such, no part of your client's payment on termination of employment can be treated as a directed termination payment.

Conclusion:

Your client's payment on termination of employment is not a transitional termination payment. Therefore, the amount in excess of the tax-free amount of the redundancy payment is taxed according to its employment termination payment (ETP) components.

As your client is less than 55 years of age and the ETP relates wholly to a post-June 1983 taxable component, it is taxed at a rate not exceeding 30% plus Medicare Levy.