Edited version of your private ruling

Authorisation Number: 1012444981497

Ruling

Subject: Employer termination payment -transitional termination payment

Questions

1. Is any tax payable on a payment made to the taxpayer on termination of employment?

2. Is any tax payable on a payment made to the taxpayer's superannuation fund on termination of employment?

Answers

1. Yes.

2. Yes.

This ruling applies for the following periods

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

Over 15 years ago, your client was offered employment with an employer (the Company) and was employed under an employment agreement (the Agreement), which incorporated the terms and conditions of employment. The Agreement was signed and accepted.

Under the terms of the Agreement, your client's employment would continue unless either party gave a specified time of prior written notice that the Agreement was not to be extended.

In addition your client was invited to participate in the Company's Plan (the Plan) which was in place at the time.

On commencing employment with the Company, your client became a participant of the Plan.

The Plan is intended to advance the interests of the Company by providing your client with an additional incentive to promote the Company's success and encourage your client to remain in the employ of the Company.

The Plan specifies a method of calculating benefits based on the increase in the company's shareholder equity.

Under the Plan a participant's interest will be vested if the participant terminates employment after completing a certain number of years service, on the participant's death or permanent disability, having attained age 65 or in the event the participant is terminated by the Company. If a participant voluntarily resigns before their interest in the specified benefit has become vested, their entire benefit under the Plan is forfeited.

Under the Plan, when a participant terminates employment they will be entitled to receive the computation of their vested interest in their specified stock benefit which is made within a specified time after termination. The benefit payment will be made in cash and shall be subject to all applicable withholding taxes.

On termination of employment your client was entitled to receive a payment, being the value of your client's vested interest of benefits in the Plan.

Your client has provided full information regarding the calculation of benefits under the Plan.

Your client further advised that in respect to an annual payment each year, when the employer paid a dividend to the holding company. Your client received a specified percentage of the dividend payment which was included in your client's annual personal income.

Your client has provided the Company's financial statements to support the increase in shareholder equity on which their entitlement was calculated.

In the relevant income year:

· the Company provided a Transitional termination payment - pre-payment statement for your client which shows the total amount as a transitional termination payment - taxable component.

· your client instructed the Company to direct an amount of the transitional termination payment - taxable component to your client's account with a complying superannuation fund (the Fund).

· the Company made a directed termination payment to the trustee of the Fund.

· your client terminated employment with the Company.

The employer made the payment with an amount of tax withheld to your client to be included in your client's income tax return for the relevant income year.

Your client has reached preservation age.

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 Section 82-135.

Income Tax Assessment Act 1997 Paragraph 82-135(m).

Income Tax Assessment Act 1997 Subsection 83A-10(1).

Income Tax Assessment Act 1997 Subsection 83A-10(2).

Income Tax Assessment Act 1997 Subsection 295-190(1).

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 Section 82-10F.

Income tax (Transitional Provisions) Act 1997 Subsection 82-10F(1).

Income tax (Transitional Provisions) Act 1997 Subsection 82-10F(2).

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

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

Reasons for decision

Summary

The taxable component of the payment made under the terms of a plan (the Plan) to your client in the relevant income year is a transitional termination payment.

Under the transitional arrangements, the payment made on your client's behalf by the employer, to the complying superannuation fund (the Fund) will be treated as a directed termination payment. Consequently, the Fund will pay the relevant tax at the Fund's tax rate on the payment, rather than at your client's marginal rate.

The remaining amount made to your client is to be included as assessable income in your client's income tax return for the 2011-12 income year and will be taxed at no more than:

15% - up to the lower cap amount of $165,000; and

30% - amount above $165,000 up to the upper cap amount of $1,000,000;  and

45% - amount above the upper cap amount of $1,000,000.

In addition the Medicare levy will apply.

Detailed reasoning

Employment termination payment

A payment made to an employee 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.

Your client commenced employment with an employer (the Company). Under the terms of employment your client became a participant in the Company's plan (the Plan).

Under the Plan a participant's interest in a specified benefit will be vested if the participant terminates employment after completing a certain number of years service, on the participant's death or permanent disability, having attained age 65 or in the event the participant is terminated by the Company. If a participant voluntarily resigns before their interest in the specified benefit has become vested, their entire benefit under the Plan is forfeited.

Therefore the vested benefit is only payable on the condition that the participant has terminated their employment with the Company. No entitlement to the payment arises prior to this event. The payment directly relates to the termination of their employment.

Therefore, as a participant of the Plan your client was entitled to receive their vested interest on termination of employment.

Based on the information provided, it is evident the payment is paid in consequence of the termination of your client's employment with the Company.

Thus, the requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

Your client terminated employment in the relevant income year, the same year in which the payment was made. Therefore the 12 month requirement under paragraph 82-130(1)(b) of the ITAA 1997 has been satisfied.

The requirement under paragraph 82-130(1)(c) of the ITAA 1997 concerns section 82-135, which specifically excludes certain payments from being employment termination payments.

These payments include any accrued annual and long service leave, the tax-free parts of a genuine redundancy payment or an early retirement scheme payment and employee share schemes as well as other types of payments which do not apply to an employment termination payment.

However, subsection 82-135(m) of the ITAA 1997 provides that an amount you receive, that is included in your assessable income under Division 83A of this Act (which deals with employee share schemes), will not be an employment termination payment.

Relevant to this case consideration must be given as to whether the payment under the Plan is a payment from an employee share scheme.

Employee share scheme

Subsection 83A-10(1) of the ITAA 1997 states:

An ESS interest, in a company, is a beneficial interest in:

(a) a share in the company, or

(b) a right to acquire a beneficial interest in a share in the company.

Other provisions within Division 83A then determine when any discount received in respect of an ESS interest acquired under an employee share scheme is included in your client's assessable income and how much the discount is.

Subsection 83A-10(2) of the ITAA 1997 states:

An employee share scheme is a scheme under which ESS interests in a company are provided to employees, or associates of employees, (including past or prospective employees) of:

(a) the company, or

(b) subsidiaries of the company

in relation to the employees' employment.

In this case, the rights granted to your client under the Plan provide your client with the right to receive an amount of cash. The Plan does not provide your client with shares or the right to acquire shares. Therefore, the Plan is not an employee share scheme.

The payment is an employment termination payment

Consequently, the payment is not of a type paragraph 82-130(1)(c) of the ITAA 1997 would exclude from being an employment termination payment.

As all the conditions in subsection 82-130(1) of the ITAA 1997 have been satisfied, the payment is to be treated as an employment termination payment.

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 made in relation to a life benefit termination payment (as defined in subsection 82-130(2) of the ITAA 1997) must be made by 30 June 2012 and meet 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.

The terms contract, law and agreement all connote circumstances that are binding on the employer. The circumstances as they exist just before 10 May 2006, must be such that the employer is obliged by force of a contract, law or agreement to pay a specific amount or to pay an amount according to the specifications of a method or a formula. As explained at paragraph 4.67 of the Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006, a person must be entitled as at 9 May 2006, to a payment on termination of employment.

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)]

The first issue for consideration is whether the payment to be made to an employee satisfies the requirement of being an entitlement under a written contract.

Essentially, in order for the entitlement to be provided for under a particular employment agreement as in force just before 10 May 2006 an employee must have been entitled to receive a payment under the agreement just before 10 May 2006. Further, the agreement must still be in place when the payment is made, and the employee must still be entitled to that payment at the time of their termination.

This means that if, for instance, the employee is employed under a different agreement at the time of termination, or if the provision relating to the payment has been amended between 9 May 2006 and the time of termination, the payment will not meet this requirement of a transitional termination payment.

However, subsection 82-10(3) of the IT(TP)A 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.

In this case, your client commenced employment with the Company under an employment agreement (the Agreement) which was entered into and commenced over 15 years ago. The Agreement which incorporates the terms and conditions of employment included participation in the Plan.

The Agreement is the only contract in place from the date of signing until the date of your client's termination.

Under the terms of the Plan, your client was granted a specified entitlement based on the increase in value of Company shareholder equity.

The Plan provides a method of calculating your client's benefits based on that increase.

Under the Plan, when a participant terminates employment they will be entitled to receive their vested interest. The benefit payment will be made in cash and shall be subject to all applicable withholding taxes.

In this case your client received an amount on termination of employment calculated in accordance with the Plan.

The Plan was in place before 10 May 2006.

The method of calculating your client's entitlement on termination was in accordance with the Plan. Furthermore, your client's employment Agreement allows for the payment to be determined under the Plan.

Hence, as the payment is being made under an agreement in force just before 10 May 2006, the payment is considered to be a transitional termination payment.

Consequently, all the requirements under section 82-10 of the IT(TP)A have been satisfied. The payment is a transitional termination payment made in the 2011-12 income year.

Under the transitional arrangements, the employee may choose to direct an employment termination payment to be made on their behalf to a superannuation fund. Transitional termination payments may be:

· directed (in full or in part) to a superannuation fund, ADF or RSA; or

· used (in full or in part) to buy a superannuation income stream.

Transitional termination payments not directed into a superannuation fund

Transitional termination payments are made up of two components:

· Tax fee component - this includes the post-June 1994 invalidity and pre-July 83 component (if any); and

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

The taxable component of a transitional termination payment paid in cash, forms part of your client's assessable income.

The amount of tax on the taxable component depends on the person's age and whether they received any earlier transitional termination payments.

The transitional termination payment - taxable component made to your client is to be included in your client's assessable income for the relevant income year. As your client has reached preservation age the payment will be taxed at no more than:

· 15% - up to the lower cap amount of $165,000; and

· 30% - amount above $165,000 up to the upper cap amount of $1,000,000;  and

· 45% - amount above the $1,000,000.

Both the lower cap amount and the $1,000,000 (upper cap amount) are reduced by all amounts received by your client that have previously used the transitional termination payments concession. In addition the Medicare levy may apply.

Directed termination payments

Section 82-10F of the IT(TP)A states:

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

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

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

Choice to make payment

2. An individual may choose, within 30 days after a pre-payment statement about a transitional termination payment is given to the individual under section 82-10E, to direct the payer to use all or part of the payment to make a payment on behalf of the individual:

(a) to a complying plan; or

(b) to purchase a superannuation annuity.

3. To make a choice, the individual must:

(a) make it in an approved form; and

(b) give the completed form to the payer.

4. The payer must, immediately after receiving a completed form under subsection (3):

(a) give the entity (or entities) to which the payment is directed written notice of the amount that is to be paid, and of the tax free component of the amount; and

(b) comply with the direction (or directions) in the form.

Personal contributions and roll-over amounts included in assessable income of an entity are set out in the table under subsection 295-190(1) of the ITAA 1997.

Item 3 of the table shows the taxable component of a directed termination payment (within the meaning of section 82-10F of the IT(TP)A) is assessable income of a complying superannuation fund, a complying approved deposit fund and a retirement savings account provider.

In the relevant income year, the Company made a directed termination payment to the Fund on behalf of your client.

Therefore, the directed termination payment is to be included as assessable income of the Fund in the relevant income year.

Consequently, the Fund will pay the relevant tax at the Fund's tax rate (generally 15%) arising on the payment, rather than at your client's marginal rate.

Please note, any amounts above $1,000,000 that are rolled over will have the excess above $1,000,000 taxed at the top marginal tax rate plus Medicare levy.

Both the lower cap amount and the $1,000,000 upper cap amount are reduced by all taxable component amounts of any transitional ETPs received by your client that have previously used the transitional ETP concession.