Private ruling: Subject
Published: June 2012
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the proposed payment being made under a redundancy policy (the Policy), that is above the tax free limit of a genuine redundancy payment, a transitional termination payment as defined in section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A)? | A1: Yes. | Q2: Can a portion of the proposed payment be a directed termination payment under section 82-10F of the IT(TP)A? | A2: Yes.

Relevant facts and circumstances: Over 20 years ago, an offer of employment was made to your client by an employer (the Employer). Your client signed and accepted the offer and commenced employment. This is your client's only contract in place from the date of signing with the Employer until the date of your client's termination of employment. Under the terms and conditions of employment your client is required to abide by all policies of the Employer as replaced, amended or varied from time to time. In late 2005, the Employer approved a redundancy policy (the Policy) which was effective from the third quarter of the 2005-06 income year. The Policy was circulated by the employer and was applicable and made available to staff on request from the third quarter of the 2005-06 income year. Redundancy calculations made to the employer's staff, terminated from the third quarter of the 2005-06 income year, were calculated in accordance with the Policy effectively from the third quarter of the 2005-06 income year. The Policy document was subsequently modified in some minor respects and published on the employee website in the second quarter of the 2006-07 income year. However, the terms of the severance package that came into effect from the third quarter of the 2005-06 income year have not been subsequently amended in any way. The Employer made a decision to make your client redundant and terminate your client's employment in 2012. A redundancy payment will be made to your client under the Policy. In a letter dated early this year, the Employer has certified that your client was an employee for a specified number of years. During the term of your client's employment with the Employer, your client was continuously employed under the standard contract signed over 2 decades ago. Accordingly, your client was also covered by the Policy which was in place from the third quarter of the 2005-06 income year. Your client will have completed a specified number of whole years of service with the Employer when your client's position is made redundant. Under the Policy, your client was entitled to a redundancy package as a result of retrenchment which includes a payment in lieu of notice and severance payments. Your client's Redundancy Statement shows the Severance Payment calculated includes a notice period, redundancy payment and an age service premium. The amount that is, the amount in excess of the tax free amount of a genuine redundancy is shown as the taxable component of an employment termination payment. Your client is under the age of 65 years. Assumptions Your client has agreed with the following assumptions being made for the directed termination payment being made for your client in the 2011-12 income year. Those assumptions are: · your client intends to give written notice on an approved form to the employer, within 30 days of receiving a pre-payment statement about a transitional termination payment, and · directs the employer to make all or part of the payment on behalf of your client, to a complying superannuation fund; and · the employer gives the written notice to the fund of the amount that is to be paid and of the tax free component of the amount and comply with the directions in the form.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 295-190(1). | Income Tax Assessment Act 1997 Section 82-130. | 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). | Income tax (Transitional Provisions) Act 1997 Subsection 82-10(4). | Income tax (Transitional Provisions) Act 1997 Section 82-10E. | Income tax (Transitional Provisions) Act 1997 Section 82-10F. Summary | The amount in excess of the tax free amount of the genuine redundancy payment to be made to your client in 2011-12 income year is a transitional employment termination payment. | Your client may choose within 30 days of receiving a pre payment statement from the Employer to direct the transitional termination payment or part of it on your client's behalf to a complying superannuation plan. | Detailed reasoning | Payments made in consequence of the termination of a taxpayer's employment are known as employment termination payments. | Employment termination payments cannot be rolled over into a complying superannuation fund, unless the payment qualifies as a transitional termination payment under section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A) . Transitional termination payment | Under section 82-10 of the IT(TP)A, a life benefit termination payment received between 1 July 2007 and 30 June 2012 is a transitional termination payment in the following circumstances: | (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. | 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 the present case, your client was employed under a contract of employment over 20 years ago. The policies of the employer were not incorporated in your client's contract of employment, however the employer's redundancy policy (the Policy) which is applicable from the third quarter of the 2005-06 income year, is incorporated into the employment relationship and form part of the matrix of the overall contract of employment between your client and the Employer. | The Policy provides for your client's entitlements in the event your client is made redundant and retrenched. A specified clause of the Policy refers to the severance package which would be used to calculate your client's total severance pay entitlement in the event your client is retrenched by reason of redundancy. | The Policy is a Workplace Agreement within the meaning of the Workplace Relations Act 1996 . It provides a method of calculating what your client would be entitled to when retrenched. The Policy was applicable from the third quarter of the 2005-06 income year. Therefore, your client's entitlement provided for under the Policy was in place before 10 May 2006. It is noted that the Policy was subsequently modified in some minor respects in the second quarter of the 2006-07 income year. However, the terms of the severance package that came into effect from the third quarter of the 2005-06 income year have not been amended in any way. | In addition, the Employer has certified that your client was covered by the Policy in place from the third quarter of the 2005-06 income year. | Therefore, the payment made to your client under the terms of the Policy, in excess of the tax-free redundancy amount, will be a transitional termination payment. | Under the transitional arrangements, your client may choose to direct an employment termination payment to be made on your client's behalf to a superannuation fund. | If your client directs the payment to be paid into a complying superannuation fund the payment is not assessable income and is not exempt income. | Directed termination payments | Section 82-10F of the IT(TP)A states: | 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. | Choice to make payment | 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. | To make a choice, the individual must: | (a) make it in an approved form; and | (b) give the completed form to the payer. | 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 Income Tax Assessment Act 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. Your client has agreed with the following assumptions being made for the directed termination payment being made for your client in the 2011-12 income year. Those assumptions are: | · your client intends to give written notice on an approved form to the employer, within 30 days of receiving a pre-payment statement about a transitional termination payment, and | · directs the employer to make all or part of the payment on behalf of your client, to a complying superannuation fund; and | · the employer gives the written notice to the fund of the amount that is to be paid and of the tax free component of the amount and comply with the directions in the form. | Therefore, in this case the directed termination payment of the taxable component is to be included in the income year in which it is received by the superannuation provider as assessable income of the fund in the 2011-12 income year. | Consequently, the fund, rather than your client, 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 million that are rolled over will have the excess above $1 million taxed at the top marginal tax rate plus Medicare levy. Amounts of less than $1 million will be treated as a taxable contribution to the fund but will not count against the $50,000 cap on concessional contributions. | This $1 million cap is reduced by the taxable component of any transitional termination payment made to your client since 1 July 2007, whether paid to your client or directed to your client's superannuation fund.


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