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Ruling

Subject: Transitional termination payment - directed termination payment

Questions:

1. Is any part of the termination payment to be received by your client on termination of employment a transitional termination payment as defined in section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A)?

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 IT(TP)A?

Answers:

1. No

2. No

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

Your client commenced employment with the employer a number of years ago.

Your client was appointed to a senior position with the employer in the 1995-96 income year.

Your client has not signed an employment contract with the employer as no employment contracts were available when he commenced employment.

Your client's employment was covered by the employer's Enterprise Agreement 2009-2011 (the Agreement) of the Fair Work Act 2009 at the time that the employment was terminated.

The application for approval of the Agreement was lodged and approved in the 2009-10 income year.

The Agreement supersedes the employer's Certified Agreement and is also intended to supersede the provision of the Award in their entirety.

Your client negotiated a severance payment with the employer.

Your client entered into a Deed of Settlement and Release (the Deed) with the employer regarding the termination of your client's employment.

The Deed was signed a couple months prior to the end of the 2011-12 income year.

The operative provisions of the Deed state:

§ the employee's employment will cease on a specific date (the termination day);

§ the employee will cease sick leave and commence long service from a specific date to the termination day;

§ upon termination of employment the employee will be paid in accordance with the terms set out in the Deed.

Your client intended to rollover part of the employment termination payment into a superannuation fund however the employer advised that your client is not eligible to do so as the Agreement was in force on or after 10 May 2006.

The employment termination payment has not yet been received by your client as your client is awaiting the Ruling but you have stated that the payment will be received within 12 months of the termination of employment date.

Your client is 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 Section 82-140

Income tax Assessment Act 1997 Section 82-145

Income tax Assessment Act 1997 Section 82-150

Income tax Assessment Act 1997 Section 82-155

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 paragraph 82-10(1)(b)

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

Income Tax (Transitional Provisions) Act 1997 section 82-10F

Income Tax (Transitional Provisions) Act 1997 subsection 82-10F(1)

Reasons for decision

Summary

The payment to be received by your client on the termination of his 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.

The payment of 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 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 made to your client satisfies the above requirements. Based on facts provided the Commissioner accepts the payment is an employment termination payment.

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

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 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. (emphasis added)

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 your client 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).

In this case, on termination of employment your client will be entitled to a payment, a LBTP, in accordance with the employer's Enterprise Agreement 2009-2011 (the Agreement) which is a collective agreement within the meaning of the Fair Work Act 2009.

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' [emphasis added]. 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.

In this case, your client commenced employment with the employer a number years ago. Your client has not signed a written employment contract with the employer as no employment contracts were available when your client commenced employment. Accordingly, your client was not employed under a written employment contract with the employer which was in force prior to 10 May 2006.

In respect of the Agreement, the facts show the Agreement came into operation on or after 10 May 2006 and shall continue to be in force until replace by a new Agreement. The Agreement supersedes the employer's certified Agreement for 2005/2008 and also supersedes the provisions of the Award in their entirety. The employer confirmed that your client was covered under the Agreement at the time of the termination of your client's employment and the Agreement is still in place.

In view of the above, as the Agreement came into effect after 10 May 2006, termination payments made under the Agreement would not fall under the transitional arrangements in section 82-10 of the IT(TP)A.

It should also be noted that your client entered into a Deed recently with the employer in relation to the termination of your client's 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 payment specified under the severance payment arrangements at one of the clauses of the Agreement. However, it is not necessary to determine whether your client received the employment termination payment under the Agreement or the Deed. The facts show that neither the Agreement nor the Deed was in force just before 10 May 2006. In fact, they came into force on or after 10 May 2006.

Consequently, the requirement in paragraph 82-10(1)(b) of the IT(TP)A is not satisfied and the payment your client will receive in relation to the termination of your client's employment from the employer is not a transitional termination payment under section 82-10 of the IT(TP)A.

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 IT(TP)A.

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

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

Tax Treatment of the settlement payment as an LBTP:

An employment termination payment will be comprised of the following components:

§ Tax free component - as provided in section 82-140 of the ITAA 1997, this includes an invalidity segment within the meaning of section 82-150 of the ITAA 1997 (if any) and/or a pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997 (if any); and

§ Taxable component - the amount remaining after deducting the tax free component calculated in accordance with section 82-140 from the total payment, as prescribed in section 82-145 of the ITAA 1997.

Your client commenced employment with the employer after 1 July 1983. Accordingly the period of employment to which the Settlement Sum relates commenced after 1 July 1983. Hence, the LBTP does not have a pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997.

As the LBTP contains neither a pre-July 83 segment nor an invalidity segment within the meaning of section 82-150 of the ITAA 1997, the LBTP has no tax free component as defined in section 82-140 of the ITAA 1997. Rather the entire LBTP is a taxable component of an employment termination payment as defined in section 82-145 of the ITAA 1997. Accordingly, the entire amount is a taxable component of an employment termination payment to be included in your client's income tax return for the 2011-12 income year.

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