Edited version of your private ruling

Authorisation Number: 1012022842504

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Transitional termination payment

Questions:

1. Is any part of the unused sick leave (the payment) made under a Deed of Release a transitional termination payment in accordance with section 82-10 of the Income Tax (Transitional Provisions) Act 1997 and capable of being rolled over to a complying superannuation fund?

2. Is any part of the payment made to a complying superannuation fund included in its assessable income for the 2010-11 income year?

Answers:

1. No

2. No

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The member of a complying superannuation fund (the Fund) commenced employment with an organisation a number of years ago.

The member's initial appointment was made by way of executive resolution. Under this appointment, on resignation after 10 years service, employees were entitled to payment of two weeks accumulated sick leave for each year of service. The General Secretary also had the discretion to approve the payment out of any or all accrued sick leave and from time to time termination payments were made in excess of two weeks per year of service.

In the 1996-97 income year, the organisation and employees agreed that the conditions of employment should be in writing and incorporated them into a written contract. The agreement was executed and came into force prior to 10 May 2006.

In the 2002-03 income year, the organisation amalgamated with another organisation to form a new organisation (the employer). All conditions of employment were preserved on amalgamation.

In the 2006-07 income year, the member of the Fund was elected to a specific position (the position). This election entitled the member to hold office as the incumbent official until a specific date in 2011 (the contract day).

The member was unsuccessful in an attempt to hold on to his position. This caused practical difficulties for the overall governance of the organisation and under the circumstances the employer authorised their representative (the representative) to negotiate a resignation arrangement for the member.

Prior to the end of the 2009-10 income year, the member emailed the representative outlining proposed arrangements including details of payments for their resignation.

In an email reply the representative indicated that in principle he had no objection to any of the proposed items mentioned in the member's email.

In the beginning of the 2010-11 income year, the member of the Fund signed a Mutual Deed of Release (the Deed) wherein the member agreed to terminate their employment with the employer effective in a specific date (the termination day).

In the Deed, it was stated that the employer will make a payment to the member of the Fund in accordance with an attachment. The payment includes:

(1) salary component

(2) long service leave

(3) annual leave

(4) three weeks pay for each completed year of service and pro rata part thereof calculated to a specific period

(5) employer's superannuation contributions

(6) payment to the member of the Fund of all sick leave standing to the credit of the member to the date ceasing service.

Pursuant to the Fund member's direction and with the agreement of the employer the net some of the termination payment was to be distributed as follows:

(1) the employer to retain the sum of an amount in consideration for the member of the Fund to purchase of the employer's motor vehicle;

(2) unused sick leave to be made into the Fund; and

(3) remaining balance of the payment to be paid into the member's bank account.

A copy of the conditions of employment collective agreement (the Agreement) has been provided. The Agreement was first accepted in the 1997-98 income year, amended and adopted by staff effective in the 2002-03 income year.

The Agreement was further amended in the 2007-08 and 2008-09 income years. However, the condition of accumulated sick leave has remained unchanged.

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 Subparagraph 82-130(a)(i).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Subsection 301-20(2)82-135.

Income Tax (Transitional Provisions) Act 1997 Section 82-10.

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(2).

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

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

Reasons for decision

Summary

The payment received by the member of a complying superannuation fund on the termination of the member's 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 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.

Accordingly, the payment to the Fund is a non-concessional contribution (i.e. the member's own personal superannuation contribution).

The entire payment is a taxable component of an LBTP, and is included in full in the member's assessable income for the 2010-11 income year. However, the member of the Fund will be entitled to a tax offset to ensure that the rate of tax on the taxable component of the payment will not exceed 30% plus Medicare levy.

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 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 unused sick leave (the payment) made to the member of a complying superannuation fund (the Fund) 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:

As previously determined, 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.

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.

As the payment made to the member of the Fund is a LBTP the next issue for consideration is whether the payment made to the member of the Fund 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 (the EM) 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 (e.g., shares). [Schedule 2, item 2, subsections 82-10(3) and (4)]

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 the facts of this case, the member of the Fund commenced employment with the employer a number of years ago and has held a specific position (the position) in the 2006-07 income year until the termination of they employment. The employer has a workplace employment agreement (the Agreement) which came into force prior to 10 May 2006.

The Agreement contains a clause stipulating the conditions on termination of employment and accumulated sick leave entitlements on resignation or retirement. The Agreement was amended in the 2002-03 income year and further amended in 2007-08 and 2008-09 income years. The amended Agreement contains the same terms in relation to accumulated sick leave an employee is entitled to on termination of their employment.

As previously mentioned, 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. Accordingly, even though the Fund member's accumulated sick leave was made under the Agreement it cannot not be a transitional termination payment as it was not in force as at 9 May 2006.

In addition, due to an unsuccessful attempt to hold onto his position, the member of the Fund negotiated a resignation package with the employer's representative at the end of the 2009-10 income year. As a result, a Mutual Deed of Release (the Deed) was signed in the beginning of the 2010-11 income year by the member of the Fund and the employer. Both parties agreed that the termination of employment shall occur in accordance with the terms set out in the Deed.

One of the clauses of the Deed states that this Deed constitutes the entire agreement between the parties as to its subject matter to the exclusion of any prior agreement whether written or oral, express or in any way implied.

In view of the above it is considered that the payment received by the member of the Fund was not made in relation to 'a contract, law, instrument or agreement as in force just before 10 May 2006' but provided for in the Deed (a new contract) which supersedes any prior understanding or Agreement.

Further, the fact that the member's employment contract contains a specific reference to the payment of unused sick leave in the Agreement does not change the fact that the member's entitlement to the termination payment was made under a Deed and not the member's employment contract. Accordingly, the payment made on termination of the member's employment is not considered as a transitional termination payment for the purposes of section 80-10 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 received by the member of the Fund is not a transitional termination payment the member 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 the member of the Fund can still make the payment into a superannuation fund as a non-concessional contribution.

Accordingly, the amount made into the Fund is a non-concessional contribution (i.e. the member's own personal superannuation contribution). The trustee of the Fund is not required to remit tax on a non-concessional contribution provided a tax deduction is not claimed by the member of the Fund.

Tax Treatment of the payment as a LBTP:

An LBTP made after 1 July 2007 is comprised of the following components:

o Tax-free component - this includes the pre-July 83 segment of the payment (if any) and/or the invalidity segment (if any); and

o Taxable component - the amount remaining after deducting the tax-free component from the total payment.

In this case, as the member's period of employment to which the LBTP relates commenced after 1 July 1983, the LBTP does not have a pre-July 83 segment.

In addition, as the LBTP was not made because the member of the Fund ceased being gainfully employed as a result of suffering from ill-health, there is also no invalidity segment for the purposes of section 82-150 of the ITAA 1997.

Consequently the LBTP the member of the Fund received contains no tax-free component as defined in section 82-140 of the ITAA 1997. Rather the entire LBTP is a taxable component as defined in section 82-145 of the ITAA 1997. According the entire LBTP is included in your assessable income for the 2010-11 income year.

The taxable component is subject to tax, depending on the person's age when the settlement payment is received.

As the member of the Fund is under 55 years of age, where the payment does not exceed the employment termination payment cap amount ($160,000) that is specified for the 2010-11 income year under section 82-160 of the ITAA 1997, the payment will be taxed at a maximum rate of 30% plus Medicare levy.

A tax offset will apply to ensure the amount of tax is not greater than 30% plus Medicare levy in accordance of subsection 301-20(2) of the ITAA 1997.

It should be noted the member's employment termination payment cap amount is reduced by the amount of any other life benefit termination payments the member receive:

o in the same income year; and

o in respect of the same employment termination.

If any amount of the member's employment termination payment is in excess of his employment termination payment cap amount, it will be taxed at the top marginal tax rate plus Medicare levy.