Private ruling: Transitional termination payment - directed termination payment
Published: June 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the payment you will receive on termination of your employment a transitional termination payment? | A1: No. | Q2: Will the payment be treated as a directed termination payment if it is paid into a complying superannuation fund? | A2: No


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 Subsection 82-130(2) | Income tax Assessment Act 1997 Section 82-140 | Income tax Assessment Act 1997 Section 82-145 | Income tax Assessment Act 1997 Section 82-150 | Income tax Assessment Act 1997 Section 82-155 | 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 Paragraph 82-10(1)(a). | Income tax (Transitional Provisions) Act 1997 Paragraph 82-10(1)(b). | 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(6). | Income tax (Transitional Provisions) Act 1997 Section 82-10G.

Reasons for decision: Summary: The payment you will receive is not a transitional termination payment as it is not entitlement provided under a written contract, a law of the Commonwealth, a State, a Territory or another country, an instrument under such a law, or a collective agreement as in force just before 10 May 2006. The payment is made under a policy document that was in force after 10 May 2006 and which replaced earlier policy documents, some of which came into force after 10 May 2006. As the payment is not a transitional termination payment it cannot ne paid into a superannuation fund as a directed termination payment. | Detailed Reasoning - Transitional termination payment: 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). Subsection 82-10(1) of the IT(TP)A states that: 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. (emphasis added) The first issue for consideration is whether the payment to be made to you satisfies the requirement of being an entitlement under a written contract. In this case you were employed by the Employer. You were employed under awards which do not refer to redundancy entitlements nor do they provide a method of calculating entitlements in a redundancy situation. However, these entitlements are prescribed in a policy document. All policy documents must be applied by the Employer and its subsidiaries. It is purported that each policy document forms part of the contract of employment of employees of the Employer and its subsidiaries. The payments are acknowledged by the Employer to be an entitlement of the employees and it is mandatory for all subsidiaries of the Employer to apply the entitlement in a redundancy situation. As noted in the facts, your current severance payment entitlements are prescribed in a number of policy documents over the years starting with one which issued in the 1997-98 income year and culminating with one which issued in the 2011-12 income year. On termination of your employment with the Employer you will receive a redundancy payment in accordance with the policy document. The policy document provides the method to calculate your redundancy payment. It is noted that as part of the update to the latest policy document, the following disclaimer was added: | Detailed Reasoning - Disclaimer: This Policy may be varied, withdrawn or replaced at any time without notice. This Policy is not intended to legally bind the [Employer], its officers, employees or agents or have contractual effect or form part of any legally enforceable employment contract of any [reference to employer's industry] employee. This would then infer that the payment authorised under the policy document has no contractual effect, nor does it form part of you employment contract with the Employer. If this is the case, then clearly the payment cannot be a transitional termination payment as it fails to meet the criteria set out under subsection 82-10(1) of the IT(TP)A. However, even if the disclaimer contained in the policy document were not present, it is considered that the payment would still not be a transitional termination payment for the following reasons. | Detailed Reasoning - Contract in force before 10 May 2006: Paragraph 82-10(1)(b) of the IT(TP)A requires that the entitlement is provided for under a contract as in force just before 10 May 2006. | Detailed Reasoning - Subsection 82-10(3) of the IT(TP)A states:: This division applies in relation to a life benefit termination payment only to the extent that the contract, law or agreement as in place just before 10 May 2006 specifies the amount of the payment, or a way to work out a specific amount of the payment. The words " to the extent " used in Subsection 82-10(3) of the IT(TP)A provide scope for part of a life benefit termination payment to be treated as a transitional termination payment where a part of the payment is referable to a contract which was in force just before 10 May 2006. This interpretation of how subsection 82-10(3) of the IT(TP)A applies is supported or confirmed by subsection 82-10(6) of the IT(TP)A which states: | Detailed Reasoning - 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 addition subsection 82-10(4) of the IT(TP)A states: 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; … In this case, you commenced employment with the employer in the 1994-95 income year. At the time you were covered by a policy document which issued in the 1997-98 income year. As noted in the facts, the policy document contained the basis for calculating your voluntary redundancy payments. This basis for calculating voluntary redundancy payments remained unchanged when this policy document was replaced by a new policy document towards the end of the 2007-08 income year. This newer policy document was superseded by another policy document over a year later. Again, the basis for calculating voluntary redundancy payments remained unchanged. Towards the end of the 2010-11 income year, the earlier policy document was superseded by a new policy document which provides for exactly the same voluntary redundancy payments as the earlier policy document but added a one off incentivised voluntary redundancy offer. Later, the policy document was updated to remove the one off incentivised voluntary redundancy offer. The most update to date policy document, which came into force in the 2011-12 income year now provides for exactly the same voluntary redundancy payments as the earlier policy documents. Your employment with the Employer will be terminated in the last quarter of the 2011-12 income year. Therefore, it is considered that the termination payment to be received is to be ultimately calculated in accordance with the updated policy document which came into force in the 2011-12 income year. The explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 which, as enacted, introduced section 82-10 of the IT(TP)A states at paragraph 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 )] Thus, in applying subsections 82-10(3) and 82-10(4) of the IT(TP)A it is important to consider the intent of the transitional provisions which was to ensure that the eligible termination payment provisions which operated prior to 1 July 2007 were not subject to abuse where recipients of termination payments could direct unlimited amounts of such payments to superannuation funds. In this case, the policy document which issued in the 1997-98 income year was clearly intended to be replaced and superseded by subsequent policy documents which came into effect after 10 May 2006. | Detailed Reasoning - The word 'replace' is defined in The Macquarie Dictionary as:: 1. to fill or take the place of; substitute for (a person or thing): electricity has replaced gas as a means of illumination. 2. to provide a substitute or equivalent in the place of: to replace a broken vase. … | Detailed Reasoning - Likewise, the word 'supersede' is defined in The Macquarie Dictionary as:: 1. to replace in power, authority, effectiveness, acceptance, use, etc., as by another person or thing. 2. to set aside, as void, useless, or obsolete, now usually in favour of something mentioned. … It is clear that if it was the intention that each successive policy document were to be simply an update of the previous one then the words 'replace' or 'supersede' would not have been used. Whilst the entitlements are the same under both the policy document in force just before 10 May 2006 and the new policy documents applicable after 10 May 2006, the voluntary redundancy payment will be paid under the relevant provisions of the new policy documents applicable on or after 10 May 2006. Hence, as the payment will not be made under an agreement in force just before 10 May 2006, it is not a transitional termination payment. Therefore, the requirements under section 82-10 of the IT(TP)A have not been satisfied in respect of your voluntary termination payment. | Detailed Reasoning - Directed termination payment: As the voluntary termination payment is not considered to be a transitional termination payment it cannot be a directed termination payment. | Detailed Reasoning - Disclaimer: You cannot rely on the rulings in the Register of private binding rulings in your tax affairs. You can only rely on a private ruling that we have given to you or to someone acting on your behalf. The Register of private binding rulings is a public record of private rulings issued by the ATO. The register is an historical record of rulings, and we do not update it to reflect changes in the law or our policies. The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You are under 55 years of age. | You were appointed as a senior officer in the 1999-2000 income year. In the 2008-09 income year you were appointed to another senior officer role at a higher grade. | You were employed under awards which do not contain any reference to redundancy packages, voluntary or otherwise. However, these entitlements are prescribed in a policy document. | All policy documents must be applied by the Employer and its subsidiaries. Each policy document forms part of the contract of employment of employees of the Employer and its subsidiaries. The payments are acknowledged by the Employer to be an entitlement of the employees and it is mandatory for all subsidiaries of the Employer to apply the entitlement in a redundancy situation. | Prior to 10 May 2006 you were covered by a policy document which issued in the 1997-98 income year. | The policy document was clearly replaced and superseded a number of times although the basis for calculating voluntary redundancy payments remained unchanged. | In one instance, the policy document was superseded by a new policy document which provided for exactly the same voluntary redundancy payments as the earlier policy document, but added a one off incentivised voluntary redundancy offer. | In a recent letter, the employer advised you that you no longer have a substantive position and are an excess employee from the date of this letter. | In the 2011-12 income year you signed an accepted voluntary redundancy and terminated your services with the employer. | Your employment will be terminated in the last quarter of the 2011-12 income year. Therefore, the termination payment to be received is to be ultimately calculated in accordance with the updated policy document which came into force in the 2011-12 income year.