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Edited version of your written advice
Authorisation Number: 1012745435043
Ruling
Subject: Employment termination payment - extension of the 12 month rule
Question
Will the Commissioner determine under subsection 82-130(5) of the Income Tax Assessment Act 1997 (ITAA 1997) that the 12 month rule under paragraph 82-130(1)(b) of the ITAA 1997 will not apply?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2015.
The scheme commenced on:
1 July 2014.
Relevant facts and circumstances
1. You are below 60 years of age.
2. As a result of a restructure in the industry of which you were employed, you were made redundant by your previous employer during the 20XX income year.
3. In order to assist workers who were directly impacted by this restructure, a Deed was signed during the 20XX income year whereby a third party (the Company) received a grant from the State Government to pay transitional support payments (TSPs) to eligible employees.
4. A private ruling notice of decision was issued during the 20YY income year which stated that the TSPs received or to be received by eligible employees within 12 months of termination of employment were employment termination payments.
5. Not all applicants received redundancy entitlements under the 20XX grant as there were insufficient funds.
6. During the 20ZZ income year, the Company received additional funding. This new grant allows the Company to make payments to applicants that are newly eligible and other applicants who could not be paid due to insufficient funds allocated under the previous grant.
7. As a result, you have become entitled to a payment of $X which will be paid more than 12 months after your employment termination date.
8. Your private ruling request is solely in relation to the amounts in excess of the tax-free part of a genuine redundancy payment. That is, the ETP component. Any payments for unused annual leave and long service leave will not be included in the ETP component.
9. You have requested the Commissioner to make a determination under subsection 82-130(5) of the ITAA 1997 so that the 12-month rule does not apply to your payment.
10. The payment will not be made by the Company until the Commissioner's determination has been made.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 995-1
Income Tax Assessment Act 1997 Section 82-130
Income Tax Assessment Act 1997 Subsection 82-130(1)
Income Tax Assessment Act 1997 Subsection 82-130(4)
Income Tax Assessment Act 1997 Subsection 82-130(5)
Income Tax Assessment Act 1997 Section 82-135
Reasons for decision
Summary
11. Based on your circumstances the Commissioner has determined that the time taken between the termination of your employment and the intended payment is reasonable. Therefore, the 12 month rule under paragraph 82-130(1)(b) of the ITAA 1997 will not apply to you.
Detailed reasoning
Employment termination payment - 12 month rule determination
12. Section 995-1 of the ITAA 1997 states that:
employment termination payment has the meaning given by section 82-130.
13. 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
14. The above three conditions need to be satisfied in order for the payment to be treated as an employment termination payment. As it has been confirmed that payments made under the previous grant were employment termination payments, the key issue in your case is the application of the 12 month rule under paragraph 82-130(1)(b) of the ITAA 1997. This is because the payment will be made more than 12 months after your employment termination date.
15. The policy objective underlying the 12 month rule is detailed in the explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006:
4.19 The 12-month rule exists to prevent abuse of the tax concession offered for these payments by using a series of payments over a number of income years. The provisions dealing with the Commissioner's ability to issue a determination are provided to allow flexibility where delays in payment are reasonable and not constructed with the intent of delivering taxation advantages.
16. In this light, subsection 82-130(5) of the ITAA 1997 authorises the Commissioner to determine in writing that the '12 month rule' does not apply if the Commissioner considers the time between the employment termination and the payment to be reasonable having regard to the following:
a) The circumstances of the employment termination, including any dispute in relation to the termination;
b) The circumstances of the payment;
c) The circumstances of the person making the payment; and
d) Any other relevant circumstances.
17. The following are considered the relevant circumstances for this case:
• There is no question over the nature of the redundancies. The major industry restructure that occurred was facilitated by both the Federal and State governments. Government funding was provided to help some participants exit the industry.
• The funding provided for 'transitional payments' was limited. As a result, some individuals were not able to receive any benefits from the scheme.
• The recipients had no control or influence over the timing of the payments. They have not been able to manipulate the timing to maximise the taxation advantages.
• The payments are intended to provide additional support to assist the employee to transition from the industry.
• There would be no undermining of the objectives of the legislation. There is no mischief at work in the timing of the additional government funding that has been provided.
18. Based on the above, the Commissioner has determined that the time taken between the termination of your employment and the intended payment is reasonable. Therefore, the 12 month rule under paragraph 82-130(1)(b) of the ITAA 1997 will not apply to your payment.