Edited version of private ruling

Authorisation Number: 1011746169043

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. Contact us at the address given in the fact sheet if you have any concerns.

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?

No

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?

No

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?

Yes, except to the extent that dependant beneficiaries are expected to benefit from the payment.

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?

No. These payments are included as assessable income in the date of death income tax return in respect of the deceased.

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:

Leave loading

Unused recreational leave

Unused long service leave - accrued after 15 August 1978 and before 18 August 1993

Unused long service leave - accrued after 17 August 1993

Rostered day off payout

No PAYG payment summary - employment termination payment has been issued by the Employer.

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:

Gross payments

Lump sum A

Allowances

Total tax withheld

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:

(1) This section applies to leave (annual leave) of the following types (whether it is made available as an entitlement or as a privilege):

(a) leave ordinarily known as annual leave, including recreational leave and annual holidays;

(b) any other leave made available in circumstances similar to those in which the leave mentioned in paragraph (a) is ordinarily made available.

(2) Your assessable income includes an unused annual leave payment that you receive.

(3) a payment that your receive in consequence of the termination of your employment is an unused annual leave payment if:

(a) it is for annual leave you have not used; or

(b) it is a bonus or other additional payment for annual leave you have not used;or

(c) it is for annual leave, or is a bonus or other additional payment for annual leave, to which you were not entitled just before the employment termination, but that would have been made available to you at a later time if it were not for the employment termination.

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

Where in the year of income, the trustee of the estate of a deceased person receives any amount which would have been assessable income in the hands of the deceased person if it had been received by him during his lifetime, that amount shall be included in the assessable income of that year of the trust estate and shall be deemed to be income to which no beneficiary is presently entitled.

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:

Subsection (1) does not apply in relation to an amount received by the trustee of the estate of a deceased person to the extent to which, if it had been received by the deceased person during his lifetime, it would have been included in the assessable income of that person by virtue of section 83-10 or 83-80 of the Income Tax Assessment Act 1997.

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:

(1) If you receive an *unused long service leave payment, your assessable income includes the part of the payment shown in this table:

*Unused long service leave payments
Item	To the extent the payment is attributable to the ...	Your assessable income includes this part of it ...
1	*pre-16/8/78 period	5%
2	*pre-18/8/93 period	100%
3	*post-17/8/93 period	100%

(2) The remainder of that part (if any) of an *unused long service leave payment that is attributable to the *pre-16/8/78 period is not assessable income and is not *exempt income.

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:

· unused long service leave which accrued after 15 August 1978 and before 18 August 1993; and

· unused long service leave which accrued after 17 August 1993,

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:

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 persons death, in consequence of the termination of the other persons 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(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:

· unused recreational leave;

· leave loading;

· unused long service leave; and

· rostered day off payout,

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):

· superannuation benefits;

· unused annual leave or long service leave payments;

· foreign termination payments covered under Subdivision 83-D; and

· the tax free part of a genuine redundancy payment or an early retirement scheme payment.

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:

· Tax free component - this includes the pre-July 83 segment (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.

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:

(2) To the extent that 1 or more beneficiaries of the estate who were death benefits dependants of the deceased have been benefited, or may be expected to benefit, from the payment:

(a) the payment is treated as if it had been made to you as a person who was a death benefits dependant of the deceased; and

(b) the payment is taken to be income to which no beneficiary is presently entitled.

(3) To the extent that 1 or more beneficiaries of the estate who were not death benefits dependants of the deceased have benefited, or may be expected to benefit, from the payment:

(a) the payment is treated as if it had been made to you as a person who was not a death benefits dependant of the deceased; and

(b) the payment is taken to be income to which no beneficiary is presently entitled.

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

A death benefits dependant, of a person who has died, is:

(a) the deceased person's *spouse or former spouse; or

(b) the deceased person's *child, aged less than 18; or

(c) any other person with whom the deceased person had an interdependency relationship under section 302-200 just before he or she died; or

(d) any other person who was a dependant of the deceased person just before he or she died

* denotes a term defined in section 995-1 of the ITAA 1997.

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.