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

Ruling: Q1: Is the proposed termination payment made by an employer a transitional termination payment as defined in section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A? | A1: Yes.

Relevant facts and circumstances: Over 15 years ago, an employee (the employee) commenced employment with Company A under an employment service agreement (the ESA). In 2000, Company A became a subsidiary Company B and the employee continued as an employee of Company B and was provided with benefits pursuant to the relevant industrial agreement in force at the time. In respect of retrenchment entitlements, the employee's contract referred to the employer's Redundancy, Redeployment and Retrenchment policy. The ESA signed by the employee over 15 years ago, is the only contract in place from the date of signing until the date of the employee's termination of employment. The terms in respect of a redundancy payment under the employee's ESA state that upon termination of employment the employer will pay to the employee the greater of a Termination Payment equal to a specified number of weeks, or the redundancy payment calculated in accordance with a Redeployment and Retrenchment Agreement (less any payment in lieu of notice required to be made under that agreement) which ever is the greater. The employee's employment with Company B is being terminated because of redundancy and the payment is to be made in the 2011-12 income year. The redundancy payment under their contract is calculated under the current policy which is the same terms and methodology as the policy in place 10 May 2006. A representative of Company B has advised the employee's years of service for the purpose of calculating the redundancy payment.

Relevant legislative provisions: 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.

Reasons for decision: Summary: The amount in excess of the tax free amount of the genuine redundancy payment to be made to the employee in 2011-12 income year is a transitional employment termination payment. | Detailed Reasoning - Transitional termination payment: A life benefit termination payment made between 1 July 2007 and 30 June 2012 may be a transitional termination payment under section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A) . Under subsection 82-10(1) of the IT(TP)A, a life benefit termination payment received on or after 1 July 2007 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. 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. In this case, an employee (the employee) of a company (Company B) is employed under an employment contract which was entered into prior to 10 May 2006. The contract is the only contract in place from the date of signing until the date of the employee's termination. Although the employee is being paid the termination payment calculated in accordance with the current policy, this policy calculates the payment using the same methodology as the previous policy which was in place prior to 10 May 2006. The retrenchment payment to be made in the 2011-2012 income year for the employee is calculated under the same condition and method of calculating the employee's entitlement on redundancy as terms under the previous policy which was in place just before 10 May 2006. As such, the employee's contract of employment allow for the payment to be determined by the pre May 2006 contract. Hence, as the payment is being made under a contract as in force 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 amount in excess of the tax free amount of the genuine redundancy payment to be made to the employee will be a transitional employment termination payment in 2011-12 income year as defined in section 82-10. Transitional employment termination payments may be: · rolled-over (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 before 1 July 2012. | Detailed Reasoning - 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. | Detailed Reasoning - 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: · make it in an approved form; and · 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. Therefore, the employee 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 the employee's behalf to a complying superannuation plan or to purchase a superannuation annuity. If the employee directs the payment to be made into a complying superannuation fund 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. Consequently, the fund rather than the employee, will pay the relevant tax at the fund's tax rate (generally 15%) arising on the payment, rather than at the employee's marginal rate.

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