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Ruling

Subject: Employment termination payment - transitional termination payment

Question:

Is the payment made under a Deed of Release (the Deed) in relation to the termination of employment in an earlier year of income considered to be a transitional termination payment as defined in section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A)?

Answer:

No.

Question:

Is the payment a directed termination payment under section 82-10F of the IT(TP)A?

Answer:

No.

This ruling applies for the following period

For the year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts circumstances

Over 10 years ago, your client commenced employment with a company and continued on after the merger of the company with another company (Company 1).

From mid 2006, your client held a position with Company 1 until the termination of your client's employment.

In early 2009 your client's employment with Company 1 was terminated due to redundancy.

Company 1's Redundancy Policy (the Policy) provided that if your client's position was made redundant your client would receive, in addition to the Notice, a specified number of week's redundancy payment for specified number of years service.

A payment calculated under the Policy was made to you client in early 2009 which included a taxable component. This was included in your client's 2009 income tax return and assessed as a transitional termination payment.

Company 1 made a directed termination payment on behalf of your client to a fund (the Fund) for the 2008-09 income year.

Your client disagreed with the amount of the termination payment and in late 2009, a Statement of Claim was received in a Federal Court of Australia, in a State District Registry, to commence proceedings against Company 1 (now taken over by Company 2).

Discussions were held between both parties. Company 1/Company 2 denied the allegations and claims made by your client as stated in the Proceedings however it was agreed to settle the matter.

In a Deed of Release dated late 2010 (the Deed) Company 2 and your client agreed to settle all claims on the terms set out in the Deed.

In the Deed in stated that at a specified date, a total transfer of the business of Company 1 was effected and that Company 2 became the successor in law to Company 1 and all assets and liabilities of Company 1 became the assets and liabilities of Company 2.

The Deed also stated that within a specified number of days of the making of the consent orders by the specified court, Company 2 would make an eligible termination payment to your client less applicable taxes in respect of your client's claims concerning payments made on your client's redundancy.

Under the Deed, your client releases Company 2 and their related bodies corporate from any claim arising from or connected with the employment, the termination of employment, the proceedings, the circumstances or allegations referred to in the proceedings or any claim which could reasonably have been known to your client as at the date of the Deed.

The Deed refers to the entire agreement and at a specified clause stated that the Deed contains the entire agreement between the parties with respect to its subject matter. It sets out the only conduct relied on by the parties and, to the full extent permissible by law, supersedes all earlier conduct made by or existing between the parties with respect to its subject matter.

For reasons not disclosed to the Commissioner, a representative of Company 2 recently advised they paid more than the amount stated in the Deed to your client's lawyers for legal fees and included this amount as a payment to your client.

A PAYG payment summary - employment termination payment for the year ending 30 June 2011, made by Company 2 in late 2010 to your client, shows a taxable component with an amount of tax withheld. The payment summary also indicates the payment is related to a prior payment for the same termination and is not a transitional termination payment.

In late 2010, Company 2 paid an amount from the above payment to a fund (the Fund) on behalf of your client.

In mid 2011, a representative from Company 2 advised the above PAYG payment summary - employment termination payment was completed incorrectly and issued a new payment summary. The new payment summary indicated the payment was a transitional termination payment as it was related to the original genuine redundancy payment which was a transitional termination payment.

Your client is under age 65 years when the payment was made.

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 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 Paragraph 82-130(4)(a).

Income Tax Assessment Act 1997 Subsection 82-130(5).

Income Tax Assessment Act 1997 Subsection 82-130(7).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Section 83-295.

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(2).

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

Income tax (Transitional Provisions) Act 1997 Subsection 82-10(4).

Income tax (Transitional Provisions) Act 1997 Subsection 82-10(5).

Income tax (Transitional Provisions) Act 1997 Subsection 82-10(6).

Reasons for decision

Summary

The payment made to your client during the 2010-11 income year is an employment termination payment (ETP) made under a Deed of Release (the Deed) which was not in force before 10 May 2006. Therefore, the payment does not meet the requirements to be a transitional termination payment.

As the payment does not meet the requirements to be a transitional termination payment (TTP) it cannot be a directed termination payment and the payment made on behalf of your client by Company 2 to the Fund is considered to be a personal contribution. As the amount is not being claimed as a tax deduction the payment is a non-concessional contribution and will be counted towards your client's non-concessional contributions cap.

Detailed reasoning

Employment termination payment

A payment made to an employee is an employment termination payment (ETP) 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 the payment was made in consequence of the termination of your client's employment with Company 1. Thus, subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

Of particular importance is the requirement in paragraph 82-130(1)(b) of the ITAA 1997; that is, the ETP must be received within 12 months subsequent to the termination of employment.

The 12 month rule

To qualify as an ETP, the payment must be received no later than 12 months after the termination of the taxpayer's employment (paragraph 82-130(1)(b) of the ITAA 1997). Payments received more than 12 months after the termination of the employment do not qualify as ETPs and will be taxed as ordinary income at marginal tax rates under the terms of section 83-295.

However, by virtue of paragraph 82-130(4)(a) of the ITAA 1997, the 12 month rule prescribed in paragraph 82-130(1)(b), will not apply to a taxpayer if they are covered by a determination made by the Commissioner under either subsection 82-130(5) or subsection 82-130(7).

Determination made by the Commissioner

The Employment Termination Payments (12 months rule) Determination 2007 (SPR 2007/1) is a legislative instrument made by the Commissioner of Taxation pursuant to subsection 82-130(7) of the ITAA 1997. This instrument applies to ETPs received after 30 June 2007.

This instrument makes a payment received more than 12 months after termination of a person's employment an ETP, if the delay in the payment was due to the commencement of legal action concerning either or both:

(a) the person's entitlement to the payment;

(b) the amount of the person's entitlement;

and the legal action was commenced within 12 months of the termination of employment.

According to SPR 2007/1, legal action is intended to cover any Court, Tribunal, and other procedures of a judicial or quasi-judicial nature which may result in the payment in consequence of the termination of a person's employment.

In this case your client's employment ceased in early 2009 and the legal action in relation to the payment commenced in late 2009. Accordingly, your client's legal action was commenced within 12 months of your client's termination of employment.

Having regard to all of the above, the Commissioner is satisfied the delay in the payment is reasonable given that it arose as a result of a legal dispute over the entitlement and the payment is an employment termination payment.

Transitional termination payment

Some ETPs made between 1 July 2007 and 30 June 2012 are subject to transitional arrangements. To qualify as a TTP, 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 (IT(TP)A).

Section 82-10 of the IT(TP)A 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.

In early 2009, your client received a payment under Company 1's Redundancy Policy (the Policy). This payment qualified as a TTP as it was paid in accordance with the Policy in place prior to 10 May 2006. This was included in your client's 2009 income tax return and assessed as a TTP.

Your client disagreed with the amount of the termination of employment payment calculated under the Policy believing it should be based on different annual earnings and in late 2009 lodged a claim in a Federal Court of Australia, in a State District Registry.

Discussions were held between both parties. Company 1/Company 2 denied the allegations and claims made by your client as stated in the Proceedings but agreed to settle the matter and make an additional payment to settle all claims under the terms set out in the Deed.

The Deed refers to the entire agreement and at a specified clause stated that the Deed contains the entire agreement between the parties with respect to its subject matter. It sets out the only conduct relied on by the parties and, to the full extent permissible by law, supersedes all earlier conduct made by or existing between the parties with respect to its subject matter.

Therefore, it cannot be said that the payment made under the Deed to your client was received because of your client's entitlement to it under a written contract or agreement as in force before 10 May 2006 as required under subsection 82-10(1) of the IT(TP)A. The payment was clearly made under a Deed of Release. Furthermore, the Deed supersedes all earlier conduct and agreements made by or existing between your client and Company 1/Company 2.

Hence, as the payment was not made under a contract, law, instrument or an agreement in force before 10 May 2006, the second limb of subsection 82-10(1) of the IT(TP)A is not satisfied and the payment is not a TTP.

Directed termination payments

For a payment to be a directed termination payment the requirements under subsection 82-10F(1) of the IT(TP)A state:

A transitional termination payment (or part of such a payment) is a directed termination payment if:

· the individual chooses, in accordance with this section, to direct the payment (or part of the payment) to be made; and

· the payment (or part of the payment) is made on the individual's behalf as directed.

In this case the payment is not a TTP therefore the first requirement under subsection 82-10F(1) of the IT(TP)A has not been satisfied. Therefore, the payment made to the Fund cannot be directed transitional termination payment.

The payment made on behalf of your client to the Fund is considered to be a personal contribution. As the amount is not being claimed as a tax deduction the payment is a non-concessional contribution which will counted towards your client's non-concessional contributions.