Private ruling: Employment termination payment - transitional termination payment
Published: July 2012
Ruling period: For the year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is an amount in excess of the tax free amount of a genuine redundancy payment made a transitional termination payment as defined in section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A)? | A1: No.

Relevant facts and circumstances: Over 20 years ago, an employee (the employee) commenced employment with an employer (the employer). The employee's employment service agreement (ESA) has been updated during the term of the employee's employment to reflect changes in role and promotions. Over 10 years ago, the employee was promoted to a specific level. A copy of the agreement regarding the promotion could not be provided however the employer has advised that the ESA would have included a redundancy clause that was the same as the redundancy clause contained in the employee's ESA in 2010. In mid 2010, the employee was offered another specified position with the employer. In mid 2010, the employee signed the agreement formally acknowledging acceptance of the offer of the new position on the terms and conditions as set out in the ESA (2010 ESA). The effective date in this position commenced mid 2010. The 2010 ESA is the latest contract of employment between the employee and the employer. The terms in respect of termination by the employer due to redundancy under the employee's 2010 ESA state at a specific clause that the employer may terminate the employee's employment in the case of redundancy by giving a specific number of weeks notice which may be required to work through the notice period or receive a payment in lieu of notice which will be calculated on the basis of the employee's total remuneration package (TRP). The 2010 ESA further states that upon termination of the employee's employment due to redundancy, the employer will pay the greater of a termination payment equal to a number of specified weeks calculated on the basis of the employee's TRP or a retrenchment payment calculated in accordance with the employer's enterprise agreement. The employer has advised that the employee had various employment contracts during the employee's period of tenure with the employer. The 2010 ESA is an updated contract, due to a change in role, which contained a specific redundancy clause which provided that the employee was entitled upon redundancy to the greater of a number of specified weeks TRP or an appropriate amount calculated under the employer's Industrial Agreement. The employer advised the formula for calculating the redundancy amount for the employee under the employer's current Industrial Agreement is exactly the same as the formula that would have applied under the employer's prior Industrial Agreement which was entered into prior to 10 May 2006. In early 2012, the employee was made redundant and received a redundancy payment on the termination of employment. Based on the employee's length of service of a specified number of years, the employee's redundancy payment was calculated under the employer's 2011 Enterprise Agreement (2011 EA) which is greater than the amount calculated under the employee's 2010 ESA. The employer has advised that from mid 2000, when the employee was promoted to a specific level, any redundancy calculation would automatically be calculated under the EA as this would have resulted in a greater amount than under the employee's relevant ESA. Both the 2006 and 2011 Enterprise Agreements use the same methodology to calculate payments for redundancy. The employer has advised that the 2010 ESA was an update to the employee's 2000 ESA to reflect a change in role/position but not a change to any other terms of employment. Authorisation has been provided by the employee for the employer to request a ruling regarding the tax payable for the payment made to the employee in the 2011-12 income year. The employee is under the age of 55 years.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-130. | 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).

Reasons for decision: Summary: The amount in excess of the tax free limit of the genuine redundancy payment made under the employee's 2010 ESA in the 2011-12 income year, is not a transitional termination payment. The amount is a life benefit employment termination payment. | Detailed Reasoning - Detailed reasoning: Under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997), a life benefit termination payment is an employment termination payment received by a person in consequence of the termination of the person's employment unless and to the extent that it is a tax-free genuine redundancy payment. The payment generally has to be received within 12 months of the termination. | Detailed Reasoning - Transitional termination payment: Under section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (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 )] In the facts of this case, the employee commenced employment under an workplace employment service agreement (ESA) with an employer (the employer), over 20 years ago. The employee's ESAs have been updated during the term of the employee's employment to reflect changes in role and promotions. In mid 2010, the employee was made an offer of another specified position with the employer. As a condition of this offer, the employee was required to sign an updated employment contract which details the new terms and conditions of the employee's employment. In mid 2010, the employee signed the new ESA (2010 ESA) formally acknowledging acceptance of the offer of the new position. The effective date in this position commenced mid 2010. This clearly indicates that it is the intention of the parties to the agreement that the 2010 ESA was a new contract of employment which terminated and replaced the previous employment agreement. The 2010 ESA contains a clause that provides the conditions on termination of employment and entitlements on redundancy. In early 2012, the employer terminated the employee's employment due to the employee's position being made redundant. A redundancy payment calculated under the employer's Enterprise Agreement 2011(2011 EA) was made to the employee on the termination of employment. The amount in excess of the tax free limits was taxed as an employment termination payment. The employer has advised that the employee had various employment contracts during the employee's period of tenure with the employer. The 2010 ESA is an updated contract, due to a change in role, which contained a specific redundancy clause which provided that the employee was entitled upon redundancy to the greater of a specified number of weeks of TRP or an appropriate amount calculated under the employer's Industrial Agreement. The employer's Enterprise Agreement 2006 (2006 EA) was replaced in early 2011 by the current employer's Enterprise Agreement 2011 (2011 EA). The formula for calculating the redundancy amount for the employee under the employer's 2011 EA is exactly the same as the formula that would have applied under the employer's prior 2006 EA which were applicable to the employee and which was entered into prior to 10 May 2006. Based on the employee's length of service, the employer calculated the employee's redundancy payment under the 2011 EA which is greater than the amount calculated under the employee's 2010 ESA. Although entitlements may be the same under a workplace agreement in force just before 10 May 2006 and a new agreement entered into after 10 May 2006, the payment is made under the relevant provisions of the new agreement that was first entered into on or after 10 May 2006. Therefore, the second limb of subsection 82-10(1) of the IT(TP)A is not satisfied as the employee's entitlement to the payment is provided for under the relevant provisions of the new agreement, the 2010 ESA which was signed and formally acknowledged in mid 2010. Hence, as the payment was not made under an agreement in force just before 10 May 2006, it is not a transitional termination payment. Consequently, all the requirements under section 82-10 of the IT(TP)A have not been satisfied. The amount in excess of the tax free amount of the genuine redundancy payment made to the employee is not a transitional termination payment as defined in section 82-10. The payment is a life benefit employment termination payment.

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