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Ruling

Subject: Transitional termination payments

Question

Are the payments in excess of the tax-free genuine redundancy limits made by the employer on the redundancy of its employees considered to be transitional termination payments for the purposes of the pay as you go (PAYG) withholding provisions?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2012.

The scheme commences on:

1 July 2011.

Relevant facts and circumstances

The relevant employees are those employed prior to 9 May 2006.

An entity (Entity 1) is a wholly-owned subsidiary of an entity (Entity 2) which is an overseas based industrial resources company.

An entity (Entity 3) is a wholly-owned subsidiary of Entity 1.

Entity 3 acted as the primary trading company and held all the company's assets and initially employed all of Entity 1's employees.

In the 2006-07 income year, a restructure occurred whereby the employees and assets once held by Entity 3 were transferred to Entity 1.

You have stated all existing permanent employment contracts remained in place, and all leave entitlements and length of service were recognised and transferred across to Entity 1. There were no new employment contracts issued and no break in service for employees.

Entity 1 is closing its office in the 2011-12 income year and all employees will be terminated by way of genuine redundancy.

You have provided a copy of the redundancy clauses found in the relevant employment contracts. It states the following:

· If your employment is terminated by the Company by way of redundancy as a result of your position becoming surplus to its requirements due to restructuring, reorganisation or sale of the Company's assets or business to a third party, you will receive two months payment in lieu of notice plus severance payment equal to one month per completed year of service, with a minimum of one month and a maximum of 24 months.

· These payments will be calculated on your base salary plus superannuation payments applicable at the time of redundancy. Redundancy compensation for a part year of service will be calculated on a pro rata basis.

You have confirmed that the payments in question are those that exceed the genuine redundancy tax free limits for the 2011-12 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Subsection 82-150(1)

Income Tax Assessment Act 1997 Subsection 82-130(1)
Income Tax Assessment (Transitional Provisions) Act 1997 Section 82-10

Reasons for decision

Summary

The payments in excess of the tax-free genuine redundancy limits made to the employees by way of genuine redundancy are employment termination payments (ETPs).

The ETPs do not qualify as transitional termination payments as not all of the requirements have been satisfied.

Detailed reasoning

Employment termination payment

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

employment termination payment has the meaning given by section 82-130.

Subsection 82-130(1) of the ITAA 1997 declares:

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 (discussed below)

The above three conditions need to be satisfied in order for the payment to be treated as an employment termination payment.

Failure to satisfy any of the three conditions will result in the payment not being considered an employment termination payment. Any termination payments received outside of the 12 months will be taxed as ordinary income at marginal tax rates.

According to the facts, Entity 1 is closing its office and all employees will be terminated by way of genuine redundancy. As such, the payments will be made in consequence of the termination of Entity 1's employees employment and therefore the requirement pertaining to paragraph 82-130(1)(a) is satisfied.

Further, provided the employment termination payments are made to the impacted employees within 12 month of their employment being terminated, the requirement pertaining to paragraph 82-130(1)(b) will be satisfied.

Employment termination payment exclusions

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

· payment for unused annual leave or unused long service leave;

· the tax-free part of a genuine redundancy payment or an early retirement scheme payment; and

· reasonable capital payments for personal injury.

As such, this provision excludes payments or benefits that compensate or reimburses the taxpayer for or in respect of the particular injury.

As none of the above apply to the circumstances in the present case, the requirements pertaining to paragraph 82-130(1)(c) are satisfied.

Transitional termination payments

Employment termination payments cannot be rolled over into a complying superannuation fund, unless the payment qualifies as a transitional termination payment.

Transitional termination payments are defined in section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA). Under subsection 82-10(1) of the ITTPA a termination payment made between 1 July 2007 and 30 June 2012 is a transitional termination payment in the following circumstances:

· the payment is received by a person because the person is 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, and

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

Subsection 82-10(3) of the ITTPA states that the payment will be a transitional termination payment to the extent the contract, law, instrument or agreement specifies an amount of the payment, or a method or formula by which a specific amount of the payment can be determined.

If an amount is paid in excess of the amount specified in the written contract, the extra amount will be an employment termination payment under section 82-130 of the ITAA 1997.

The term written contract is not defined in the legislation, therefore it is necessary to look at the normal meaning of the term.

It is clear that individual written contracts of employment are written contracts for the purposes of section 82-10 of the ITTPA. Therefore, if any terms in a taxpayer's written contract specify the taxpayer is entitled to a payment on the termination of their employment, and provides a way to calculate the payment, it will meet this condition of a transitional termination payment.

However, the facts state that a restructure within the group resulted in the transfer of employees and assets previously contracted by Entity 3 to Entity 1. As of this date Entity 1 became the new contracting party.

This change in contracting parties has voided the original contract between Entity 3 and the relevant employees and as such a new express contract has been created between Entity 1 and the employees. This is still the case despite the facts stating that no new employment contracts were issued and that there was no break in service for the employees.

As the creation of a new contract occurred after 10 may 2006, the employment termination payments do not qualify as transitional termination payments under subsection 82-10(1) of the ITTPA.