Edited version of private advice

Authorisation Number: 1051968167645

Date of advice: 31 March 2022

Ruling

Subject: Employment termination payment - 12 month rule

Question 1

Is the payment received by the Estate an employment termination payment (ETP) that needs to be included in the Estate's tax return?

Answer

Yes. The payment is an ETP and must be included in the Estate's tax return.

Question 2

Will the Commissioner determine that the time between the employment termination and the payment is reasonable pursuant to subsection 82-130(5) of the Income Tax Assessment Act 1997?

Answer

Yes. Having regard to the factors in paragraphs 82-130(5)(a) to (d), the Commissioner has determined that the time between the employment termination and the payment is reasonable. The 12 month rule will not apply for the purposes of determining if the payment is an ETP pursuant to section 82-130.

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commences:

XX 20XX

Relevant facts and circumstances

The individual died on xx 20XX.

The individual died without a will.

The Court made an order on xx 20XX granting probate to the individual's parent, under Letters of Administration.

The beneficiaries of the Estate are the individual's parents and sibling.

None of the beneficiaries were financially dependent on the individual.

The individual was a key employee of an employer.

The employer was the beneficial owner and beneficiary of a life insurance policy over the individual's life and this was not part of any superannuation account.

The employer received life insurance proceeds.

The employer subsequently paid the full proceeds to the Estate on xx 20XX as a death benefit employment termination payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 subsection 82-130(5)

Income Tax Assessment Act 1997 subdivision 82-B

Income Tax Assessment Act 1997 section 82-75

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Detailed reasoning

Is the payment an ETP?

Payments made in consequence of the termination of a taxpayer's employment are known as employment termination payments. Where the payment is received during the life of the taxpayer it is known as a 'life benefit termination payment'. Where the payment is received after the death of the taxpayer, it is known as a 'death benefit termination payment'.

Section 995-1 states that an employment termination payment has the meaning given by section 82-130.

Subsection 82-130(1) provides:

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.

All of the conditions under subsection 82-130(1) are required to be satisfied in order for the payment to be treated as an employment termination payment.

We consider that the first condition is met; the payment received by the Estate is in consequence of the deceased's employment.

The payment received by the Estate does not include any of the payments listed in section 82-135. Therefore this condition is satisfied.

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

Payments made later than 12 months after the termination

Paragraph 82-130(4)(a) states that the 12 month rule will not apply if a person is covered by a determination made by the Commissioner under either subsection 82-130(5) or subsection 82-130(7).

You have requested the Commissioner make a determination under subsection 82-130(5) that paragraph (1)(b) does not apply.

Having regard to the factors in paragraphs 82-130(5)(a) to (d), the Commissioner has determined that due to the circumstances surrounding the individual's death and the fact that the individual died intestate, the time between the employment termination and the payment is reasonable. The 12 month rule will not apply for the purposes of determining if the payment is an ETP pursuant to section 82-130.

We consider that the payment received by the Estate is an ETP.

Taxation of death benefit termination payments

Subdivision 82-B covers the taxation of death benefit termination payments. It consists of two components:

•         a tax-free component, consisting of an invalidity segment and a pre-July 1983 segment and

•         a taxable component, which consists of the balance of the payment.

In your circumstances, there is no tax-free component.

The method of taxing the taxable component varies according to whether the benefit is paid to dependants, non-dependants or the trustee of a deceased estate.

Section 82-75 applies where the death benefit termination payment is made to the trustee of the deceased estate. In this situation, the payment is treated separately according to the dependency status of the beneficiaries who have benefited, or may be expected to benefit, from the deceased estate. Furthermore, the amount is deemed to be income to which no beneficiary is presently entitled, with the result that the trustee is liable to pay the tax.

In your circumstances the payment was paid to the trustee of the deceased estate and the beneficiaries of the estate are non-dependants. An offset applies so that the tax on the taxable component up to the ETP cap amount does not exceed 30%, plus Medicare levy, and the remainder is taxed at the top marginal rate plus Medicare levy.