Private ruling: Transitional termination payment
Published: September 2012
Ruling period: Year ending 30 June 2009
Date scheme commenced: 1 July 2008

Ruling: Q1: Is the termination payment made by an employer in the 2008-09 income year 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: In 19XX, your client commenced employment with an employer (the employer). In early 200X, your client's employment was terminated due to redundancy. In a letter dated early 200X the employer advised that your client would receive a severance benefit calculated in the terms of the employer's redundancy policy. A payment calculated in terms of the employer's redundancy policy was made to your client on termination of employment for the year ended 30 June 200X which included a 'tax free' amount. A PAYG payment summary - employment termination payment for the year ending 30 June 200X was made by the employer to your client which shows a taxable component with an amount of tax withheld. The payment was treated as a non transitional termination payment. Your client was not covered by the employer's general Agreements of 200Y and 200Z because of your client's position and salary. Your client was employed under a separate contract entered into in 19XX.

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 payment made to your client during the 2008-09 income year in excess of the tax-free amount of a genuine redundancy payment is a transitional termination payment. | 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. Based on the information provided, it is evident the payment is paid in consequence of the termination of your client's employment with an employer (the employer). Thus, subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied and the amount made in excess of the tax free part of a genuine redundancy amount is a life benefit termination payment. As your client's employment was terminated in early 200X and the payment was received by your client in the 2008-09 income year, the 12 month requirement under paragraph 82-130(1)(b) of the ITAA 1997 has been satisfied. Section 82-135 of the ITAA 1997 specifically excludes certain payments from being employment termination payments. These payments include any accrued annual and long service leave and the tax-free parts of a genuine redundancy payment or an early retirement scheme payment as well as other types of payments which do not apply to an employment termination payment. As stated in the facts of this case, the payment was made when your client's employment was terminated by the employer by way of redundancy which included a severance payment and an amount in lieu of notice. Of the amount received a portion of the payment is thereby excluded as a genuine redundancy payment. Accordingly, the amount in excess of the tax-free part of the genuine redundancy payment is to be treated as an employment termination payment under subsection 82-130(1) of the ITAA 1997. | Detailed Reasoning - 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 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. 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. You have advised that your client signed an employment contract on your client's commencement with the employer in 19XX but could not produce a copy. In the letter dated early 200X which notified your client of your client's position being made redundant, it also stated a severance benefit will be paid ' in terms of the employer's redundancy policy '. In Reynolds v Southcorp Wines Pty Ltd [2002] FCA 712 Hely J said (at 56): …Severance provisions contained in an employer's policies or procedures manual may become incorporated into a contract of employment: The Law of Employment p 190. Whether or not that has occurred is a question of fact. The only relevant facts established in this respect by the evidence in this case are the terms of the policy itself, and that it was available to employees on the intranet. In addition, there is the fact that severance payments were made to the applicant which were consistent with the policy, without any specification that they were made ex gratia . That may amount to an admission (by conduct) of an entitlement. Therefore, based on the above, retrenchment payments do not have to be specifically referred to in an employment contract in order to be incorporated into the contract. In this case we know: · the employee did have a contract in place from early 19XX; · the employer had a redundancy policy in 200Y (set out in the employer's Enterprise Agreement 200Z); and · the redundancy policy was readily available to employees (for example: in publications, on the intranet). This being the case, it can be concluded that the employer's redundancy policy was incorporated into your client's contract of employment. In the same letter from the employer, they advised the payment made was in accordance with the retrenchment policy in place at the time of your client's retrenchment, that is, post 9 May 2006. On this point, if the redundancy policy at the time of termination is essentially the same as the policy as it stood before 10 May 2006, that is, there is no difference in the method of calculating an employee's entitlement, then it may be argued that the payment was made in accordance with a pre 10 May 2006 contract and is a transitional termination payment (see Perfrement and Commissioner of Taxation [2011] AATA 264). It is known from the copies of the employer's general agreements that both the 200Y and 200Z agreements had identical methods for calculating the redundancy entitlements of employees. The fact that the employer treated the payment as a termination payment rather than a transitional termination payment is non conclusive of its true character. For example, in Player v Commissioner of Taxation [2011] FCA 869, Edmonds J said (at 18): … At [12] the Tribunal says that there is 'clear and cogent evidence that the Applicant did not receive [the] amount in trust but rather it was received by her and treated by her as an ETP'. This suggests, to the reader, that the fact that the applicant treated the payment as an ETP (eligible termination payment) in her filings with the Commissioner was fatal to the payment qualifying as a 'roll-over superannuation benefit' for the purposes of s 306-10 of the 1997 Act. That cannot be correct. How a taxpayer characterises a receipt in the taxpayer's filings with the Commissioner is never conclusive of its true character, albeit evidence of how the taxpayer viewed its character. In this case, your client was 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 methodology of the 200Y Agreement, this agreement uses the same methodology as the 200Z Agreement which was in place prior to 10 May 2006. It must be remembered the entitlement to the payment comes from the 19XX employment contract. Therefore, the retrenchment payment made in the 2008-09 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 200Z Agreement which was in place before 10 May 2006. As such, the employee's contract of employment allows 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 is a transitional employment termination payment in 2008-09 income year as defined in section 82-10. | Detailed Reasoning - In conclusion: The payment made to your client during the 2008-09 income year in excess of the tax-free amount of a genuine redundancy payment is a transitional termination payment.

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