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Ruling

Subject: Transitional termination payment

Question

Is any part of the termination payment to be paid to your client a transitional termination payment?

Answer

No

This ruling applies for the following period:

2011-12 income year

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Your client was employed by the employer since the early 1990s.

Your client and the employer entered into a contract by way of an Employment Deed (the Employment Contract) in the 2004-05 income year.

The Employment Contract indicates that the Total Fixed Remuneration (TFR) means the amount of money paid or payable to the Employee under a specific Clause of the Employment Contract and as varied from time to time pursuant to the Employment Contract.

The Employment Contract provides a formula to work out the Employee's entitlement on termination of employment.

The Employment Contract provides that your client's total fixed remuneration in the 2004-05 income year was $X.

In the 2006-07 income year, the employer varied the Employment Contract pursuant to an Employment Deed variation ("Deed of variation").

Your client's TFR in the 2011-12 income year was $Y.

In the beginning of the 2011-12 income year, the employer terminated your client's employment in accordance with the Clause of the Employment Contract.

You advised that the employer proposes to pay your client an amount in accordance with the Employment Contract on termination of your client's employment.

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 Paragraph 82-130(1)(a)

Income Tax Assessment Act 1997 Paragraph 82-130(1)(b)

Income Tax Assessment Act 1997 Paragraph 82-130(1)(c)

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 Paragraph 82-10(1)(a)

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 Subsection 82-10(4)

Reasons for decision

Summary

The proposed employment termination payment to be paid to your client in the 2011-12 income year will not meet the legislative requirements to be a transitional termination payment.

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.

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 that the payment to be made by the employer will be paid in consequence of the termination of your client's employment with the employer. Therefore subparagraph 82-130(1)(a)(i) of the ITAA 1997 will be satisfied.

As your client's employment was terminated in the 2011-12 income year and the payment will be paid to your client before 30 June 2012, the 12 month requirement under paragraph 82-130(1)(b) of the ITAA 1997 will also be satisfied.

Section 82-135 of the ITAA 1997 specifically excludes certain payments from being an employment termination payment such as the tax-free part of a genuine redundancy payment or lump sum payments for unused annual leave and unused long service leave on termination of employment. Based on the information provided, the payment will be an employment termination payment and not an amount specifically excluded under section 82-135 of the ITAA 1997.

Accordingly, the whole amount of the payment will be treated as an employment termination payment under subsection 82-130(1) 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, 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 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA).

Section 82-10 of the ITTPA states:

(1) 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.

(2) However, this Division does not apply in relation to a life benefit termination payment received by you on or after 1 July 2012 (except to the extent provided by Subdivision 82-E).

(3) 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.

(4) For the purpose of subsection (3), a specific amount can be worked out in ways including either or both of the following:

(a) by a method or formula for working out the amount;

(b) by provision for you or another person (or entity) to make a choice between forms of payment allowing amounts to be worked out as provided by subsection (3) and paragraph (a) of this subsection.

Example:

For paragraph (b), a specific amount of a life benefit termination payment that you receive on 1 July 2007 can be worked out from the terms of your written contract if the contract provided (just before 10 May 2006) for you to choose between payment in the form of a cash amount of $100,000 or the transfer to you of 10,000 shares in a specified company.

(5) To the extent that this Division applies to a life benefit termination payment, Subdivision 82-A of the Income Tax Assessment Act 1997 does not apply to the payment (subject to Subdivision 82-E of this Act).

(6) In this Division:

transitional termination payment means:

(a) a life benefit termination payment to which this Division applies; or

(b) if this Division applies to only part of a life benefit termination payment - that part of the payment.

As discussed previously, in order to be a transitional termination payment, a life benefit termination payment received needs to satisfy the requirements of subsection 82-10(1) of the ITTPA.

We will now consider whether the lump sum payment to be paid to your client by the employer satisfies the requirement under subsection 82-10(1) of the ITTPA, namely:

· being an entitlement under a written contract or 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

· the entitlement is provided for under that contract, law, instrument or agreement as in force just before 10 May 2006.

Entitlement under a written contract or a collective agreement

The explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 which introduced section 82-10 of the ITTPA states:

4.67 The transitional arrangements apply where a person is entitled, as at 9 May 2006, to a payment on termination of employment under a written contract, Australian or foreign law, legal instrument or workplace agreement made under the Workplace Relations Act 1996, provided that the payment is made before 1 July 2012. Such a payment is referred to as a 'transitional termination payment'. Payments to which these transitional arrangements apply are not taxed under the normal employment termination payment provisions in the ITAA 1997. [Schedule 2, item 2, subsections 82-0(1), (2), (5) and (6)]

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)]

Your client had a written employment contract with the employer in the 2004-05 income year. The employment contract specified the methodology for calculating a lump sum payment on the termination of employment.

Under certain clauses of the Employment Contract your client will be paid a lump sum during the 2011-12 income year for the termination of employment.

The Employment Contract specifies that an employee whose employment is terminated prior to the end of the 2013 calendar year will be paid the amount of any unpaid Deferred Compensation as described in certain clauses of the Employment Contract.

Under a certain clause of the Employment Contract and subject to the Corporations Act, the employer will pay the employee an amount equal to a specified percentage times the employee's TFR where the employee's employment with the employer ceases prior to the end of the 2013 calendar year.

The particular Clause of the Employment Contract provides that if an employee's employment is terminated due to the employee's resignation prior to the end of the 2013 calendar year, the payment is calculated on a pro-rata basis in accordance to the formula as described in the Employment Contract.

You advised that the employer proposes to pay your client an amount in accordance with the Employment Contract on termination of your client's employment:

An employment Deed of variation made in the 2006-07 income year changed the methodology for the calculation of the lump sum.

From the facts of the case, the written employment contract in the 2004-05 income year was varied in the 2006-07 income year. However, it is accepted that the variation to the terms of employment did not result in the termination of the contract and the commencement of another.

For a payment to be considered a transitional termination payment, the entitlement must be provided for under a contract, law, instrument or agreement as in force just before 10 May 2006. Also under subsection 82-10(3) of the ITTPA the contract in force just before 10 May 2006 must specify the amount of the payment, or a way to work put a specific amount of the payment. Under subsection 82-10(4) of the ITTPA a specific amount can be worked out by a method or formula for working out the amount.

In this case, the contract of employment in the 2004-05 income year determined the calculation of the payment under specific Clauses of the Employment Contract in accordance with a specific formula.

However, the Deed of Variation made in the 2006-07 income year changed the methodology of the calculation of the lump sum on the termination of employment. The new methodology of the calculation increased the lump sum payable under the Employment Contract by a specific amount.

There was an entitlement specified under the Employment Contract in the 2004-05 income year which included a calculation of the entitlement. However, the Employment Contract was varied in the Deed of variation dated in the last quarter of the 2006-07 income year. It is considered that the inclusion of the amount in the calculation has changed the methodology of calculating the entitlement. Therefore the calculation of the entitlement, using the calculation in the Deed of variation dated in the last quarter of the 2006-07 income year is not a specified amount that was contained in the Contract of Employment prior to 10 May 2006.

Your client was employed under a contract that was in force before 10 May 2006.

As already noted above, there was an entitlement under a written contract made prior to 10 May 2006. However, the entitlement that is provided for under that contract was not in force just before 10 May 2006, as it has been determined that the Deed of variation dated in the last quarter of the 2006-07 income year changed the methodology of the entitlement. Therefore the payment does not satisfy subsection 82-10(1) of the ITTPA.

As not all the requirements under section 82-10 of the ITTPA have been met, the amount that the employer will pay your client is not a transitional termination payment.

The payment is an employment termination payment under subsection 82-130(1) of the ITAA 1997.