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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of private ruling

Authorisation Number: 1011746169043

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Ruling

Subject: Death benefit termination payment

Questions and answers

1. Is the payment of unused recreational leave and loading on the death of the deceased by the Employer included in the assessable income of the deceased estate?

2. Is the payment of unused long service leave on the death of the deceased by the Employer included in the assessable income of the deceased estate?

3. Is the payment of a rostered day-off payout on the death of the deceased by the Employer included in the assessable income of the deceased estate?

4. Are the salary and uniform allowance payments owing by the Employer at the date of death included in the assessable income of the deceased estate?

This ruling applies for the following period:

Year ending 30 June 2009

The scheme commences on:

The relevant income year

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The deceased commenced service with the Employer some years ago.

During the recent income year the deceased's employment with the Employer ceased upon the deceased's sudden death. The deceased has died intestate. The deceased's spouse is the trustee of the deceased estate and the beneficiaries of the estate include the deceased's spouse and children.

The Employer made a payment in the particular quarter of the recent income year to the trustee of the deceased estate. No tax was withheld. According to the pay advice that accompanied the payment, the components of the payment are as follows:

In the recent year the Employer issued a PAYG payment summary - individual non-business for the relevant period to the date of death. The payment summary shows the following:

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 82-65

Income Tax Assessment Act 1997 Section 82-70

Income Tax Assessment Act 1997 Section 82-75

Income Tax Assessment Act 1997 Subsection 82-75(2)

Income Tax Assessment Act 1997 Subsection 82-75(3)

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Subsection 82-130(1)

Income Tax Assessment Act 1997 Paragraph 82-130(1)(a)

Income Tax Assessment Act 1997 Paragraph 82-130(1)(b)

Income Tax Assessment Act 1997 Paragraph 82-130(1)(c)

Income Tax Assessment Act 1997 Subsection 82-130(3)

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Paragraph 82-135(c)

Income Tax Assessment Act 1997 Paragraph 82-135(d)

Income Tax Assessment Act 1997 Section 82-140

Income Tax Assessment Act 1997 Section 82-145

Income Tax Assessment Act 1997 Section 82-160

Income Tax Assessment Act 1997 Section 83-10

Income Tax Assessment Act 1997 Subsection 83-10(1)

Income Tax Assessment Act 1997 Paragraph 83-10(1)(a)

Income Tax Assessment Act 1997 Subsection 83-10(2)

Income Tax Assessment Act 1997 Subsection 83-10(3)

Income Tax Assessment Act 1997 Paragraph 83-10(3)(b)

Income Tax Assessment Act 1997 Section 83-70

Income Tax Assessment Act 1997 Section 83-75

Income Tax Assessment Act 1997 Section 83-80

Income Tax Assessment Act 1997 Subsection 83-80(1)

Income Tax Assessment Act 1997 Subsection 83-80(2)

Income Tax Assessment Act 1997 Subsection 302-195(1)

Income Tax Assessment Act 1936 Section 101A

Income Tax Assessment Act 1936 Subsection 101A(1)

Income Tax Assessment Act 1936 Subsection 101A(2)

Income Tax Assessment Act 1936 Subsection 101A(3)

Summary

The amount representing unused recreational leave and leave loading and unused long service leave is not included in the assessable income of the deceased estate and is exempt from tax.

The rostered day off payout is a death benefit termination payment and consists solely of a taxable component. Whether the payout, or any part thereof, is to be included in the assessable income of the deceased estate will depend on the extent to which dependant beneficiaries are expected to benefit from the payment.

The gross salary or wages and allowance, which is the difference between the gross payments and allowances amounts shown on the PAYG payment summary and the amount representing recreational leave, leave loading and unused long service leave that accrued after 17 August 1993, derived by the deceased prior to the date of death, are to be included in the date of death income tax return in respect of the deceased.

Detailed reasoning

Amounts derived prior to death

Amounts such as salary and wages, allowances, dividends and interest, etc. derived by the deceased prior to the date of death are assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and should be included in the date of death income tax return of the deceased.

Based on the information provided, although the PAYG payment summary - individual non-business shows gross payments of a specified amount, included in this is an amount representing recreational leave, leave loading and unused long service leave that accrued after 17 August 1993. Also included in the gross payments is an amount representing a rostered day off payout.

As these amounts are payments on termination of employment (which resulted from the death of the deceased) they were not derived prior to the date of death. Accordingly, these payments are not included as assessable income in the date of death return.

Accordingly, the gross salary and wages to be included as assessable income in the date of death return is the difference between gross payment amount shown on the PAYG payment summary and the amount representing unused recreational leave, leave loading and unused long service leave that accrued after 17 August 1993, together with the uniform allowance.

Unused recreational leave and leave loading

Section 83-10 of the ITAA 1997 deals with the taxation of unused annual leave payments that are received in consequence of the termination of a person's employment.

Section 83-10 of the ITAA 1997 states that:

Subsection 101A(1) of the Income Tax Assessment Act 1936 (ITAA 1936) states:

As the death of the deceased resulted in the termination of the deceased's employment with the Employer and the payments of unused recreational leave and leave loading were made as a result of that termination of employment, subsection 101A(1) of the ITAA 1936 would, at first, appear to apply.

However, subsection 101A(2) of the ITAA 1936 states:

Consequently, the amount representing unused recreational leave and leave loading is not included in the assessable income of the deceased estate. It is exempt from tax.

Unused long service leave

Section 83-80 of the ITAA 1997 deals with the taxation of unused long service leave payments that are received in consequence of the termination of a person's employment.

Section 83-80 of the ITAA 1997 states:

As noted above, subsection 101A(1) of the ITAA 1936 includes any amount which would have been assessable income in the hands of the deceased person if it had been received by him or her during his or her lifetime as assessable income of the deceased estate.

However, as also noted above, subsection 101A(2) of the ITAA 1936 specifically excludes any amount that would have been assessable under either section 83-10 or 83-80 of the ITAA 1997 if it had been received by the deceased during his or her lifetime.

Consequently, the amount representing:

is not included in the assessable income of the deceased estate. It is exempt from tax.

Employment termination payment

From 1 July 2007 the taxation treatment of payments made in consequence of the termination of any employment of a taxpayer changed. These payments, formerly known as eligible termination payments, are now called employment termination payments.

Subsection 82-130(1) of the ITAA 1997 states:

Subsection 82-130(3) of the ITAA 1997 states:

A death benefit termination payment is an employment termination payment to which subparagraph (1)(a)(ii) applies.

Based on the information provided, it is clearly evident that the payments representing:

were paid after the death of the deceased in consequence of the termination of the deceased's employment with the Employer. Therefore, subparagraph 82-130(1)(a)(ii) of the ITAA 1997 has been satisfied.

As the date of death (and thus the termination of employment) occurred during the particular quarter of the relevant income year and the payments were received by the trustee of the deceased estate in the subsequent quarter of the relevant 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 include (among others):

The lump sum payments include an amount in respect of unused recreational leave and leave loading which would, but for the operation of subsection 101A(2) of the ITAA 1936, be assessable under section 83-10 of the ITAA 1997 as unused annual leave payments. The payments also include an amount in respect of unused long service leave which would, but for the operation of subsection 101A(2) of the ITAA 1936, be assessable under section 83-80 of the ITAA 1997 as unused long service leave payments.

Accordingly, the amount representing unused recreational leave, leave loading and unused long service leave is specifically excluded under section 82-135 of the ITAA 1997. This then leaves the amount representing the rostered day off payout as being an employment termination payment.

As already noted above, subsection 101A(1) of the ITAA 1936 includes any amount which would have been assessable income in the hands of the deceased person if it had been received by him or her during his or her lifetime as assessable income of the deceased estate.

Further, subsection 101A(3) of the ITAA 1936 states:

To avoid doubt, if in the year of income an amount is included in the assessable income of a deceased taxpayer under Division 82 or 302 of the Income Tax Assessment Act 1997 in respect of a payment received by the trustee of the estate of the deceased taxpayer, that amount shall be included in the assessable income of that year of income of the trust estate.

Tax Treatment of the employment termination payment

An employment termination payment made after 1 July 2007 consists of the following components:

The tax free component is not assessable income and is not exempt income. The taxable component is included, in full, as assessable income.

As the rostered day off payout does not include a pre-July 83 segment or an invalidity segment, the entire amount of the payout falls within the taxable component of the payout.

Where a death benefit termination payment is made to the trustee of a deceased estate, section 82-75 of the ITAA 1997 applies. Subsections 82-75(2) and (3) state that:

Subsection 302-195(1) of the ITAA 1997 defines a death benefits dependant as follows:

In your client's case, beneficiaries of the deceased estate include the spouse and children of the deceased. The children of the deceased might or might not be death benefits dependants of the deceased within the meaning of subsection 302-195(1) of the ITAA 1997.

Whether all of the rostered day off payout, or any part thereof, is assessable income of the deceased estate will depend on whether the beneficiaries benefiting, or expected to benefit, from the payout are death benefits dependants. Where a beneficiary is not a death benefits dependant, the trustee of the deceased estate is liable to tax in respect of that part of the payout which is distributed to that beneficiary.

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