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Ruling
Subject: Employment termination payment - 12 month rule
Question
Does the 12 month rule in paragraph 82-130(1)(b) of the Income Tax Assessment Act 1997 apply to the proposed payment to a former employee?
Advice/Answers
No.
This ruling applies for the following period
Year ending 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts
In the 2009-10 income year the Employee was dismissed from their employment.
The Employee's employment with the Employer was terminated in the 2009-10 income year.
The Employee commenced legal action against the Employer regarding the termination of their employment with the Employer and the termination payment within 12 months.
A payment has not been made to the Employee yet.
Relevant legislative provisions
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)(b).
Income Tax Assessment Act 1997 Section 995-1.
Reasons for decision
Summary:
In this case, the Employee's employment with the Employer was terminated in the 2009-10 income year and a payment will be made more than 12 months after the termination of the Employee's employment. However, the Employee commenced legal action against within 12 months of the termination of their employment. Therefore, the payment is exempt from the 12 month rule.
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 of the ITAA 1997.
Subsection 82-130(1) of the ITAA 1997 states that:
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
(a) it is received no later than 12 months after that termination (but see subsection (4)); and
(b) it is not a payment mentioned in section 82-135.
Failure to satisfy any of the conditions will result in the payment not being considered an employment termination payment.
The payment is received no later than 12 months after termination
Paragraph 82-130(1)(b) of the ITAA 1997 requires that the payment must be received no later than 12 months after the termination of employment.
However, paragraph 82-130(4)(a) of the ITAA 1997 states that the 12 month rule prescribed in paragraph 82-130(1)(b) of the ITAA 1997 will not apply if a person is covered by a determination made by the Commissioner under subsection 82-130(7) of the ITAA 1997.
The Employment Termination Payments (12 month rule) Legislative Instrument 2007 is a legislative instrument made by the Commissioner of Taxation pursuant to subsection 82-130(7) of the ITAA 1997. This instrument applies to employment termination payments received after 30 June 2007.
This instrument states that a payment received more than 12 months after termination of a person's employment will be an employment termination payment if the delay in the payment was due to the commencement of legal action concerning either or both:
· the person's entitlement to the payment;
· the amount of the person's entitlement;
and the legal action was commenced within 12 months of the termination of employment.
In this case, the Employee's employment with the Employer was terminated in the 2009-10 income year and a payment will be made more than 12 months after the termination of the Employee's employment. However, the Employee commenced legal action against the Employer within 12 months of the termination of their employment. Therefore, the payment is exempt from the 12 month rule found in paragraph 82-130(1)(b) of the ITAA 1997.