Edited version of your private ruling

Authorisation Number: 1012390143810

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

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.

Ruling

Subject: Death benefit termination payment - payment to spouse

Questions

Is any part of the 'ex-gratia' payment received by your client an employment termination payment?

Is any part of the 'ex-gratia' payment received by your client a death benefit termination payment?

Answers

Yes

Yes

This ruling applies for the following period:

Year ended 30 June 2012.

The scheme commenced on:

1 July 2011.

Relevant facts and circumstances

The deceased, the late husband of your client, passed away.

The deceased was employed by an entity (Entity 1), having two periods of service with Entity 1 - the first ending in a prior decade and the second from a prior decade to the date of death.

As a consequence of the death, your client received a termination payment including worker's compensation, salary and leave entitlements and superannuation from Entity 1.

In a letter dated during the 2011-12 income year, Entity 1 advised your client it 'is now providing a further ex-gratia payment' for the amount of X. The letter stated that the payment was made to your client in good faith by the corporation with no expectation of reimbursement or offset against other monies owing to your client.

The letter states that the payment was broadly based on twice the deceased's annual salary.

Your client received a PAYG payment summary - employment termination payment detailing the following amounts:

The date of payment was during the 2011-12 income year.

You have stated that you believe Entity 1 have incorrectly withheld tax on the payment based on the notion that the payment was made by the company on a charitable basis to assist your client with her loss and the associated financial strain.

You have cited legislation and case law as references. You have also stated that the invalidity segment with regards to the tax free component of an employment termination payment (ETP) applies to the payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-60

Income Tax Assessment Act 1997 Section 82-65

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

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

Income Tax Assessment Act 1997 Subparagraph 82-130(a)(ii)

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 82-160

Reasons for decision

Summary

The payment which your client received as an ex-gratia payment satisfied all the requirements for it to be considered an employment termination payment.

As the payment was received after the death of your client's partner and in consequence of the termination of their employment, it is considered that the payment is also a death benefit termination payment.

Detailed reasoning

Employment termination payment

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

employment termination payment has the meaning given by section 82-130.

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

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

If the above three conditions are satisfied, the payment will be treated as an employment termination payment.

In consequence of employment

The first condition requires that there is:

· a payment

· received by you

· in consequence of the termination of either

· your employment, or

· another persons employment after their death.

The phrase 'in consequence of termination of employment' in subparagraph 82-130(a)(i) of the ITAA 1997 above is not defined in the legislation. However, the courts have considered the meaning of the words 'in consequence of' in relation to eligible termination payments (ETPs), the predecessor of employment termination payments.

Of note are the decisions made by the Full High Court in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325 (McIntosh).

Suffice it to say that both Courts' views were that for a payment to be made in consequence of the termination of employment it had to follow on as a result or effect of the termination of employment. Additionally, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient.

The Commissioner in Taxation Ruling TR 2003/13 considered the phrase 'in consequence of' as interpreted by the Courts. In paragraph 5 of TR 2003/13 the Commissioner states:

a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment follows as an effect or result of the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

Following the death of your client's partner, their employment was terminated. This is evident as your client received a termination payment, including workers compensation, salary and leave entitlements and superannuation from Entity 1.

According to the facts, your client received a payment described as 'a further ex-gratia payment' for the amount of X. In a letter dated during the 2011-12 income year it states that the payment was made in good faith and was broadly based on two times the deceased's annual salary. You have stated that is was paid to your client on a charitable basis to assist her with her husband's loss and financial strain.

Therefore based on the principles stated in Reseck and other cases, and the Commissioner's views expressed in TR 2003/13, the facts presented demonstrate that a clear connection exists between the termination of the deceased's employment and the payment. Your client would not otherwise have received the payment except for the termination of her partner's employment upon death.

Consequently, the payment is considered to be in consequence of the termination of the deceased's employment. Furthermore, as the payment was received by your client, the payment satisfies the requirements of paragraph 82-130(1)(a) of the ITAA 1997.

The 12 month rule

To qualify as an employment termination payment, the payment must be received no later than 12 months after the termination of the taxpayer's employment (paragraph 82-130(1)(b) of the ITAA 1997).

As the payment was made within 12 months of the employment being terminated, the requirement under paragraph 82-130(1)(b) of the ITAA 1997 is satisfied.

Exclusions

The condition specified in paragraph 82-130(1)(c) of the ITAA 1997 is that an employment termination payment does not include a payment mentioned in section 82-135 of the ITAA 1997.

Section 82-135 of the ITAA 1997 includes, but is not limited to, amounts received that are:

· superannuation benefits;

· pension or annuity payments;

· foreign termination payments;

· unused annual leave and unused long service leave; and

· the tax-free part of genuine redundancy payments or early retirement scheme payments.

In this case, the payment described as an ex-gratia payment does not resemble any of the payments mentioned in section 82-135 of the ITAA 1997. As such, the condition pertaining to paragraph 82-130(1)(c) of the ITAA 1997 is satisfied.

As all of the conditions have been satisfied, the payment your client received as an ex-gratia payment is considered to be an employment termination payment.

Death benefit termination payment

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.

As the payment is being received after the death of your client's partner and in consequence of the termination of their employment, it is considered that subparagraph 82-130(1)(a)(ii) of the ITAA 1997 applies in this case.

As such, it is considered that the payment amount of X is also a death benefit termination payment (DBTP) as defined under subsection 82-130(3) of the ITAA 1997.

Tax Treatment of the ex gratia payment as an DBTP

As the DBTP was paid by an employer rather than a superannuation fund, section 82-140 of the ITAA 1997 applies. It states an ETP is comprised of the following components:

· Tax-free component this includes the pre-July 83 segment of the payment (if any) and/or the invalidity segment (if any); and

· Taxable component the amount remaining after deducting the tax-free component from the total payment.

Subsection 82-65 of the ITAA 1997 provides that the tax-free component of a DBTP that you receive after the death of a person whom you are a death benefits dependent is not assessable income and is not exempt income. Therefore the tax-free component does not count towards assessable (or taxable) income. Further, paragraph 82-65(2)(a) of the ITAA 1997 states that the amount of the taxable component up to the ETP cap amount for the relevant year is not assessable income and is not exempt income. However, paragraph 82-65(2)(b) of the ITAA 1997 provides that the taxable component amount exceeding the ETP cap for the relevant year is assessable income and is taxed at the top marginal rate in accordance with the Income Tax Rates Act 1986.

As noted in the facts, the deceased's most recent continuous service period with Entity 1 commenced a number of years ago. According to paragraph 4 of Taxation Ruling IT 2168 it is to be taken that the service period, for the purposes of the pre-July segment of the payment, is the person's total period of most recent continuous service with the employer making the payment, unless there is evidence that shows that the payment was made in recognition of a different period of employment.

The facts state that the payment was broadly based on two times the deceased's annual salary. As such, the method of calculation was not made by reference to years of service. Further, there was no reference made concerning the period to which the payment relates in either the letter or the PAYG payment summary to prove that the payment was made in recognition of a different period of employment. As such it is taken that the period of employment to which the DBTP relates occurred after 1 July 1983 and therefore the DBTP does not have a pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997.

The payment will include an invalidity segment if the requirements under section 82-150 of the ITAA 1997 are satisfied. Subsection 82-150(1) of the ITAA 1997 states that:

An employment termination payment includes an invalidity segment if:

(a) the payment was made to a person because he or she stops being gainfully employed; and

(b) the person stopped being gainfully employed because he or she suffered from ill-health (whether physical or mental); and

(c) the gainful employment stopped before the person's last retirement day; and

(d) 2 legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the person can ever be gainfully employed in capacity for which he or she is reasonably qualified because of education, experience or training.

As the payment was made to your client directly it is clear that your client does not satisfy these conditions. This is because the DBTP was not made to your client because they ceased being gainfully employed as a result of suffering from ill-health. Therefore there is no invalidity segment for the purposes of section 82-150 of the ITAA 1997.

As the DBTP contains neither a pre-July 83 segment nor an invalidity segment, there is no tax-free component as defined in section 82-140 of the ITAA 1997. Rather the entire DBTP is a taxable component as defined in section 82-145 of the ITAA 1997.

However, as your client was the spouse of the deceased, they are considered a 'death benefits dependent' for the purposes of section 302-195 of the ITAA 1997.

The ETP cap for the 2011-12 income year was $165,000. As such, $165,000 of the payment your client received is not assessable and is not exempt income. On the PAYG Payment Summary - employment termination payment statement, this amount was incorrectly listed as the 'tax free component'. Whilst this amount is in fact tax free, it is not a tax free component of a DBTP but rather the portion of the DBTP amount up to the ETP cap amount for the 2011-12 income year.

As stated previously, any amounts exceeding the ETP cap for the relevant income year are taxed at the top marginal tax rate pursuant to 82-65(2)(a) of the ITAA 1997. Therefore the remaining amount is subject to withholding tax of 46.5% which calculates to Y (cents ignored).

As C was actually withheld from your client's payment, the difference of Z will be applied as a credit to your client's income tax liability (if any) when they lodge their tax return for the 2011-12 income year.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).