Edited version of your written advice

Authorisation Number: 1012902504323

Date of advice: 30 October 2015

Ruling

Subject: Employment termination payment

Question

Is the lump sum payment received by you an employment termination payment in accordance with section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

In the mid-19X0s you were employed with the Employer.

In early 20XX your doctor deemed you unfit for work following a diagnosis of an illness.

In late 20YY your employment with the Employer was terminated by resignation.

You engaged a solicitor to process your claim for a Partial and Permanent Disability (PPD) payment through the Employer.

In relation to the length of time to submit your application for a PPD payment you stated:

• You continued suffering from your illness during the period from the termination of employment and the payment;

• You were in a fragile psychological state and had no experience with the claims process;

• You felt overwhelmed and unable to manage further interaction with the Employer and believed that engaging a legal professional to manage your case would be the best option;

• Your initial correspondence with your solicitor was lost in transit;

• Your solicitor provided conflicting advice from that received from the Employer in regards to the medical documentation required for your claim;

• You were acutely aware of the 12 month rule and made your solicitor aware of the timeframe;

• You attempted to transfer the management of your claim to other solicitors but failed as neither could take your case; and

• Your solicitor delayed the process of you receiving the payment due to mismanagement.

Correspondence from the Employer states that the payment took longer than 12 months to process due to delays in returning your application and medical reports.

In mid-20ZZ the Employer provided you with a calculation (the calculation) of how a death and disability award payment would be taxed if it was approved by the Australian Taxation Office (ATO) as an employment termination payment (ETP).

The calculation showed the payment comprised:

(a) a tax free component of $[amount] which represented an invalidity segment;

(b) a taxable component of $[amount]; and

(c) tax withheld, in this instance, as $[amount].

The Employer also provided you with a calculation of how the $[amount] payment would be taxed if it was treated as a delayed termination payment. This calculation showed the payment would entirely compromise of a $[amount] taxable component and that the tax withheld would amount to $[amount].

In the relevant income year a PAYG payment summary shows a payment from the Employer was made to you comprising of:

Gross payments $[amount]

Total tax withheld $[amount]

Your date of birth is [date].

In your application for a private ruling you included a request for the Commissioner to make a determination under subsection 82-130(5) of the ITAA 1997 for the 12-month rule not to apply to your payment.

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

Based on your circumstances the Commissioner has determined that the time taken between the termination of your employment and the payment is reasonable. Therefore, the 12 month rule under paragraph 82-130(1)(b) of the ITAA 1997 does not apply to the payment.

As the other relevant conditions in section 82-130 of the ITAA 1997 are satisfied the payment is an employment termination payment.

Detailed reasoning

Employment termination payment

Section 995-1 of the 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.

The three conditions above need to be satisfied in order for the payment to be treated as an employment termination payment (ETP). In this case there is no question that the payment was made in consequence of the termination of employment or that it is any of the types of payments listed in section 82-135 of the ITAA 1997.

However, the key issue for consideration is the application of the 12 month rule under paragraph 82-130(1)(b) of the ITAA 1997. This is because the payment was made more than 12 months after your employment termination date.

The policy objective underlying the 12 month rule is detailed in the Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 which states:

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.

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.

The following are considered the relevant circumstances for this case:

• You continued suffering from an illness during the period from the termination of employment and the payment.

• You were in a fragile psychological state and had no prior experience with the Employer's claims process.

• There was a degree of miscommunication and delay between you and your solicitor in regards to documentation required for your claim.

• You were aware of the 12 month rule and made your solicitor aware of the timeframe.

• You attempted to transfer the management of your claim to other solicitors.

• The Employer states that the payment took longer than 12 months to process due to delays in returning your application and medical reports.

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.

As the 12 month rule does not apply to the payment, due its satisfying subsection 82-130(5) of the ITAA 1997, and the other relevant conditions in section 83-130 have been met, the payment received by you is an ETP.

Further it is noted in documentation provided by the Employer that, were it not for its concern relating to the delay in the payment being made, it considered the payment to be an ETP which included a $[amount] invalidity segment.

As it has been established that the payment is an ETP, it follows that the payment, as supported by the facts, comprises of a tax free component of $[amount] (invalidity segment) and a taxable component of $[amount].