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Ruling

Subject: Transitional termination payment

Question

Will the proposed payment to be made to you during the 2011-12 income year on termination of employment constitute a transitional termination payment?

Answer: No.

This ruling applies for the following period

Year ending 30 June 2012

The scheme commenced 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 your 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.

You commenced employment with your employer (the Employer) over 10 years ago.

In a letter and accompanying documentation (referred hereafter as the Contract) which you received before 10 May 2006, the Employer:

· confirmed your employment in relation to specified post (the Position);

· set out the terms and conditions in relation to the Position;

· stated that you may:

· be required to undertake other duties and responsibilities from time to time;

· have your reporting responsibility and/or position title altered from time to time;

· in some circumstances be required to undertake another position; and

· provided you with copies of its various policies.

You were also informed, amongst other matters, of clauses relating to termination of employment.

In cases of termination due to redundancy, one clause detailed, amongst other mattes, the periods of notice to be given, when a redundancy occurs and how the payment due to termination under the clause is calculated.

Upon termination of employment because of redundancy, the clause stated the amount payable is the greater of the amount payable under one method of calculation (method one) or an amount calculated in accordance with a method present in an attachment (the Attachment) to an Enterprise Agreement (EA) (method two).

In the Contract, as later confirmed by the Employer, it was stated that no Award or EA was binding or implied in connection with your contract of employment.

During the 2010-11 income year the Employer advised you that your Position was made redundant and you were accordingly placed on redeployment.

You believe that the redeployment will result in you being retrenched in the 2011-12 income year.

In a letter from the Employer it was stated, amongst other matters, that:

o the Attachment, referred to in the Contract, which appeared in an EA (the earlier EA), was replaced by later EAs, the latest of which relates to the 2010-11 income year and later (the current EA);

o the clause in the Contract, which related to termination due to redundancy, must be read as a reference to the current EA; and

o your entitlement to a payment in the event of a redundancy is therefore method one or the amount calculated in accordance method two found in the current EA.

Copies of the Attachment in the earlier EA and the current EA have been provided and show most of the matters relating to redundancy payments and their calculation have largely remained the same.

In the Attachment in the earlier EA, method two lists employees of various Levels with factors that increased according to their years of service. You state that you were in the highest Level.

In the current EA method two is maintained but differs in some aspects to that in the earlier EA, for example:

· the Group, which you state as belonging to, is an amalgamation of some Levels found in the Attachment; and

· the factors relating to the years of service for your Group differ. Further, the factor for an employee in your Group with your number of years of service, is greater than the factor which existed in the earlier EA.

You are less than 55 years of age.

Assumptions

You have been advised and agree with the following assumptions being made in issuing the Notice of Private Ruling:

· your proposed termination of employment will arise from a redundancy which will result in you receiving a retrenchment payment; and

· within 12 months of your proposed termination of employment you will be paid a termination payment by your Employer.

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 Section 82-135.

Income Tax Assessment Act 1997 Section 82-170.

Income Tax Assessment Act 1997 Section 82-175.

Income Tax Assessment Act 1997 Section 83-170.

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 that will be made to you in consequence of the termination of your employment will not be a transitional termination payment because the method of working out the payment is not the same as that in the contract which was just in force before 10 May 2006.

Detailed reasoning

Employment termination payments

Payments made in consequence of the termination of a taxpayer's employment are known as employment termination payments. Employment termination payments are defined in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997).

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.

To be an employment termination payment, the amount received by your client must satisfy all three conditions listed above.

The first condition requires that there is a payment received by you in consequence of the termination of your employment.

From the facts of the case, it is evident that the payment to be made to you will be in consequence of a termination of employment. The payment will not be made if there is no termination of employment. The termination of employment and the payment are intertwined and connected. If not for the termination of employment, the issue of paying a lump sum would not have arisen.

An assumption has been made that the proposed payment will be made to you from the Employer within 12 months of your termination of employment.

Payments mentioned in section 82-135 of the ITAA 1997 include:

· payments for unused annual and long service leave;

· the tax-free amount of a genuine redundancy payment; and

· a superannuation benefit.

From the facts of the case, it is clear the payment is not of a type mentioned in section 82-135, with the possible exception of a genuine redundancy payment. Whether the payment is a genuine redundancy payment as defined in section 83-170 of the ITAA 1997 will not be known until the termination of your employment takes place.

As the payment will be made in consequence of the termination of your employment, and will be made within 12 months of the termination of employment then, to the extent that the payment you receive is not the tax-free amount of a genuine redundancy payment, it is considered that the proposed payment will be an employment termination payment under section 82-130 of the ITAA 1997.

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.

The proposed employment termination payment is a life benefit termination payment as defined under subsection 82-130(2) of the ITAA 1997.

Further to the above, it should be noted that where a termination payment constitutes a genuine redundancy payment (section 83-175 of the ITAA 1997), only the amount of that payment in excess of the tax free amount (section 83-170) is an employment termination payment.

Transitional termination payment

Employment termination payments cannot be rolled over into a complying superannuation fund, unless the payment qualifies as a transitional termination payment (TTP) under section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA).

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 or a workplace agreement within the meaning of the Workplace Relations Act 1996; 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 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 to be 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). [Schedule 2, item 2, subsections 82-10(3) and (4)]

In this case, the facts provided show you are entitled to a life benefit termination payment, which will be paid in accordance with redundancy clauses in a written employment contract you have with the Employer.

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'. 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 that the written contract (the Contract) you entered into prior to 10 May 2006 comprised of terms and conditions in a letter from the Employer and accompanying documentation.

Further, as supported by a subclause in the Contract, and a letter from the Employer, the Contract does not incorporate or imply any Award or Enterprise Agreement provision to be a term of your contract of employment.

Notwithstanding the above, it should be noted a link does exist between your Contract and an Enterprise Agreement as shown in one of the provisions of the Contract, that is the provisions relating to termination of employment due to redundancy.

In the Contract there are clauses relating to the various circumstances for termination of employment and the entitlements attached to them. In your case, one clause is of relevance as it deals with termination due to redundancy.

In circumstances which involve a termination due to redundancy, a subclause in the Contract states that upon termination of employment the amount payable is the greater of the amount payable under one method of calculation (method one) or an amount calculated in accordance with a method present an attachment (the Attachment) to an Enterprise Agreement (EA) (method two).

The effect of the subclause in the Contract is that:

· it states the method or way which determines the amount to which you are entitled; and

· by making reference to the calculation of a redundancy payment in the Attachment (which was an appendix to an Enterprise Agreement, the earlier EA), a link was created between the Contract and an Enterprise Agreement (EA).

Further, as result of this subclause it can be seen that the amount payable to you under the Contract, in cases of redundancy, is affected by the provisions in an EA to the extent that they involve calculations relating to redundancy payments.

Accordingly, it follows that if changes are made to how redundancy payments are calculated in an EA it has a bearing on the amount you would receive under the Contract in relation to these types of payments.

The facts show that when you entered into the Contract prior to 10 May 2006, for the purposes of calculating the amount of your entitlement to a redundancy payment, you belonged to a Level in a table (the table) attached to the earlier EA.

The table, which was used as a part of the formula in determining the amount of a redundancy payment, shows factors, which increased according to an employee's years of service with the Employer.

In the years subsequent to your Contract being made, the earlier EA was replaced by later Enterprise Agreements (the most current being for the 2010-11 and later income years). Thus, the relevant issue is whether the calculation of redundancy payments detailed in the Attachment found in the earlier EA remains the same in the latest EA, that is, the current EA.

Though the Attachment does not appear as an appendix to the current EA, the facts show that its contents which were present when the earlier EA was in existence have largely been maintained in the current EA. Further, it is noted that most parts of the calculation of redundancy payments found in the earlier EA are reflected in the current EA.

Notwithstanding the above, it is noted that the Attachment in the earlier EA and the current EA differ as:

· the Group to which you now belong is an amalgamation of some Levels found in the Attachment in the earlier EA; and

· the factors relating to your Group for an employee with your years of service is greater than the factor which existed in the earlier EA.

As an employee with your years of service with the Employer, the factor that would be applied to you is under the earlier EA is not the same as under the current EA . In view of this, it is considered that this represents a crucial component used in calculating the amount of your redundancy payment under the EA.

Whilst it is acknowledged that you have a Contract which was in force just before 10 May 2006, it must be recalled that one of the critical elements for a payment to be a TTP is that the method or way to calculate the amount arising from the entitlement has not been changed or varied (subsection 82-10(3) of the ITTPA).

As previously stated, where there is a termination due to redundancy, a clause in your Contract states how the amount payable is to be calculated. The amount payable however is not limited to a method of calculation within the Contract as it is also linked to the calculation of redundancy payments in an EA.

Thus, where changes are made to how redundancy payments are calculated in an EA, it has a bearing in the Contract in relation to these types of payments.

In view of the above and the changes made to the current EA, which affect the calculation of the amount payable to you, it is considered the method or formula in the Contract is not the same as it was when entered into.

Critically, because of this change in the factor applying to you, being a person with your years of service, the amount you would have received if the calculation method applying to you before 10 May 2006 was applied to your termination payment in the 2011-12 income year, is not the same as the amount you will receive, calculated under the current EA.

Accordingly, as the requirement in paragraph 82-10(3) of the ITTPA is not satisfied, the proposed payment you receive in relation to your termination of employment from the Employer is not a transitional termination payment under section 82-10 of the ITTPA.