Improving Australia's Termination Payment Regulations

by Mary Swire, LawandTaxNews.com, Hong Kong

08 September 2009

Australia’s Minister for Financial Services, Superannuation and Corporate law, Chris Bowen has released final regulations in relation to the accountability of certain benefits and termination payments.

The Corporations Amendment Regulations 2009 (Improving Accountability on Termination Payments Bill) will provide a definition for 'base salary'; clarify and expand the types of benefits that are (and are not) subject to shareholder approval; and prescribe circumstances in which a benefit is given in connection with a person's retirement.

Included in ‘base salary’, and captured in the regulations, is any superannuation contribution that is paid during the relevant period, as well as any share-based payments and any liability or prospective liability to tax in respect of a fringe benefit, in the last twelve months of employment.

The types of payments made to company directors and executives, which are to be treated as a benefit after the issue of the new regulations and therefore subject to shareholder vote, include payments made from any kind of pension, except pensions paid from a superannuation fund or superannuation annuity, regardless of whether it is paid from an Australian or foreign fund.

Also included are any amounts paid as a voluntary out-of-court settlement in connection with the termination of employment.

Genuine superannuation contributions that are paid by an employer or employee on or after the regulation commences are not to be regarded as a benefit.

Additionally, reasonable payments that are consistent with those made payable to all employees in the company purely on the basis of length of service and relating to genuine redundancy, are not regarded as a benefit. Generally, a payment of a maximum of two weeks per year of service could be regarded as a reasonable amount.

The new regulation prescribes circumstances where a benefit is given in connection with retirement from an office or position and therefore, subject to a shareholder vote. This includes circumstances where share-based payments are accelerated or automatically vested at or due to retirement. Circumstances where payments are made in lieu of giving a notice of termination are also included in the regulation.

Also prescribed in the regulation is the treatment of a deferred bonus that is subject to automatic or accelerated vesting of share based payments. In this situation, a deferred bonus will be subject to shareholder approval, except where the deferred bonus is released from a restriction because of death or incapacity.

"These reforms will empower shareholders to reject excessive termination payments and promote responsible remuneration practices," Mr Bowen explained. “The Government has made sensible changes following both public and targeted consultations.”

“Importantly,” he continued, “the Government has provided clarity around the definition of ‘termination benefit’, specifically, to ensure statutory entitlements are not included as payments that require shareholder approval.”

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