Private ruling: Estate payments
Date of advice: 5 June 2019
Published: July 2019
Ruling period: 30 June 2020
Date scheme commenced: 01 July 2018

Ruling: Q1: Will the whole or some part of the payment of an amount to be made to the Estate representing the proceeds of the payment of life insurance be assessable to the Estate as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997)? | A1: No | Q2: Will the payment of an amount representing insurance proceeds received by XXXX (the Payment), be treated as an employment termination payment (ETP) for the purpose of section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No | Q3: If the Payment would be an ETP but for the operation of the 12 month rule contained in paragraph 82-130(1)(b) of the ITAA 1997, will the Commissioner of Taxation make a determination under subsection 82-130(5)? | A3: Not applicable | Q4: Will CGT event C2 occur under section 104-25 ITAA97 as a result of XXXX making the payment to the Estate ? | A4: Yes | Q5: As a result of C2 occurring when XXXX makes the payment to the Estate will the exemptions set out in in Division 118 ITAA 1997 apply to disregard any capital gain the Estate may make from the CGT event happening? | A5: Yes | Q6: Will the whole or some part of the payment be included in the assessable income of the Estate under any other provision of the ITAA 1997 or the Income Tax Assessment Act 1936 (Cth) (ITAA1936) | A6: Not applicable | Q7: If XXXX makes the payment to XXXX at the direction of the Estate, will the whole or some part of the payment be included in XXXX assessable income under any provision of the ITAA 1997 or the ITAA 1936? | A7: Not applicable

Relevant facts and circumstances: The deceased was a resident of XXXX and was employed The deceased's employment was terminated due to their death which gave rise to the Payment in accordance with the terms' of their employment contract. You have stated that XXXX is now in a position to make the Payment to the Estate. You have provided copies of the insurance policies. The deceased's Employment Contract provided that they would be eligible for certain benefits commensurate with their positon The Additional Employment Terms provides that: (a) All regular employees up to a certain upon commencement of employment are eligible for certain benefits payable on death due to all causes (b) All employees upon commencement of employment are eligible for certain benefits payable on death due to an accident arising out of and in the course of his or her employment (c) All employees up to a certain age upon commencement of employment are eligible for certain benefits payable on death due to an accident Insurance Policies In that respect, XXXX maintained the following Group insurance policies on the lives of the employees A group term life policy of insurance A group personal accident policy of A personal accident and travel policy of insurance

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 995-1. | Income Tax Assessment Act Section 6-5 | Income Tax Assessment Act 1997 Section 82-135. | Income Tax Assessment Act 1997 Subsection 82-130(1). | Income Tax Assessment Act 1997 Section 83-235. | Income Tax Assessment Act 1997 Paragraph 83-235(a). | Income Tax Assessment Act 1997 Paragraph 83-235(b). | Income Tax Assessment Act 1997 Paragraph 83-235(c). | Income Tax Assessment Act 1997 Paragraph 83-235(d). | Income Tax Assessment Act 1997 Section 118-300

Reasons for decision: Summary: Summary The payment that will be received by the Estate as a result of XXXX death whilst employed is not considered to be ordinary income as per s 6-5 of the Income Tax Assessment Act 1997 . | Detailed Reasoning - Ordinary Income: Ordinary income has generally been held to include 3 categories, namely, income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: · are earned · are expected · are relied upon, and · have an element of periodicity, recurrence or regularity. For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts ( Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433). On the other hand, if the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income. Damages awarded for past or future loss or impairment of earning capacity is not ordinary income ( Groves v. United Pacific Transport Pty Ltd [1965] Qd R 62). The capacity to earn income is a capital asset and compensation for the loss of a capital asset is a capital receipt and is not ordinary income. Taxation Determination TD 93/58 explains the circumstances in which a lump sum compensation/settlement payment is assessable, and states that such a payment is assessable income: Taxation Ruling IT 155 states the proceeds of a life policy taken out by an employer in respect of employees or a director are not assessable as income. The payments were paid by the insurers as a lump sum amount and do not have the element of repetition or regularity but rather are paid as a lump sum compensation payment made by the insurer(s) following the death of XXXX. | Detailed Reasoning - Question 2: Summary The payment that will be received by the Estate as a result of the termination of XXXX's foreign employment with XXXX due to their death is considered to be received in consequence of termination of employment. However according to paragraph 82-135(f) of the ITAA 1997 the Payment should be excluded from being ETP as a foreign termination payment. Detailed reasoning | Detailed Reasoning - Employment termination payment: · The taxation treatment of payments made in consequence of the termination of employment is an ETP and defined in the ITAA 1997. Subsection 995-1(1) of the ITAA 1997 states: employment termination payment has the meaning given by section 82-130. 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. | Detailed Reasoning - Payment is made in consequence of the termination of employment: · The first condition to be met is that there must be a payment that is made in consequence of the termination of the employment of the taxpayer. The phrase 'in consequence of' is not defined in the ITAA 1997. The Commissioner has issued Taxation Ruling TR 2003/13 titled: Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phase 'in consequence of' which discusses the meaning of the phrase. In paragraph 5 of TR 2003/13 the Commissioner states: ... a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer. As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be: ... a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case. · The phrase 'in consequence of termination of employment' has been interpreted by the courts in several cases. · Of note are the decisions made by the High Court in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 ( Reseck ) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325( McIntosh ). · Both Courts' views were that for a payment to be made in consequence of the termination of employment it had to follow on as a result or effect of the termination of employment. Additionally, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient. · Therefore if the payment follows as an effect or a result from the termination of employment, the payment will be made 'in consequence of' the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. Hence the payment will be an employment termination payment (ETP) unless the payment is specifically excluded under section 82-135. · On the basis of the information provided, XXXX's employment in XXXX with XXXX terminated due to their death. It is evident that the Payment payable by XXXX (foreign lump sum payment) would be made in consequence of the termination of employment as confirmed by the employment contract. · Therefore, the termination of their employment with XXXX and the foreign lump sum payment are all intertwined and connected. If not for the termination of the employment with XXXX due to the death, the Payment would not have been payable. · The Payment payable by XXXX will therefore be considered to have been received in consequence of the termination of employment. | Detailed Reasoning - The payment is received no later than 12 months after termination: · The second condition for the payment to be an ETP is stated in paragraph 82-130(1)(b) of the ITAA 1997. The payment must be received within 12 months of the employee's termination of employment, unless they are covered by a determination exempting them from the 12 month requirement. · You have stated that the Payment will be received by the Estate more than 12 months after the termination of XXXX's employment with XXXX. · The requirement under paragraph 82-130(1)(b) of the ITAA 1997 has therefore not been met. | Detailed Reasoning - Not a payment mentioned in section 82-135 of the ITAA 1997: Section 82-135 of the ITAA 1997 provides that certain payments are not ETPs including, (among others):  superannuation benefits;  unused annual leave or long service leave payments;  foreign termination payments covered under Subdivision 83-D of the ITAA 1997; and  the tax-free part of a genuine redundancy payment or an early retirement scheme payment. · Accordingly, in relation to the above and on the basis of the facts, it is necessary to consider whether the Payment is an amount that should be excluded from being an ETP as a foreign termination payment (paragraph 82-135(f) of the ITAA 1997). | Detailed Reasoning - Foreign termination payment: · Subdivision 83-D of the ITAA 1997 deals with termination payments that arise out of foreign employment. These payments are not ETPs, and are generally tax-free. Section 83-235 of the ITAA 1997 applies to termination payments received where the taxpayer was a foreign resident during the period of foreign employment to which the payment relates. It states that: A payment received by you is not assessable income and is not *exempt income if: (a) it was received in consequence of the termination of your employment in a foreign country; and (b) it is not a *superannuation benefit; and (c) it is not a payment of a pension or an *annuity (whether or not the payment is a superannuation benefit); and (d) it relates only to a period of employment when you were not an Australian resident. (emphasis added) · Essentially, section 83-235 requires that for a payment to be tax-free as a foreign termination payment it must be received in consequence of the termination of the taxpayer's employment in a foreign country and that the payment relates only to a period of employment when the person was a non-resident of Australia. Foreign termination payments were previously known as 'exempt non-resident foreign termination payments', as defined in former subsection 27A(1) of the Income Tax Assessment Act 1936 (ITAA 1936). A payment met that definition only if it 'related solely to a period of the employment [the terminated employment] during which the taxpayer was not a resident of Australia'. Tax Laws Amendment (Simplified Superannuation) Bill 2006 (the 2006 Bill) inserted section 83-235 into the ITAA 1997. Clause 4.3 of the Explanatory Memorandum (EM) to the 2006 Bill states that: · Schedule 2 also contains a number of provisions to move associated payments from the Income Tax Assessment Act 1936 (ITAA 1936) to the Income Tax Assessment Act 1997 (ITAA 1997). These provisions retain the same effect as under existing law but have been rewritten to reflect the current drafting style and to deliver legislative simplification. The EM to the 2006 Bill, states at paragraph 4.53 that: Division 83 of the ITAA 1997 contains the provisions related to ... foreign termination payments. The provisions relating to these payments are intended to retain their existing application but may have been redrafted to reflect current drafting approaches. The EM goes on to say, at paragraphs 4.63 and 4.64, that: Termination payments related exclusively to overseas employment or service are treated differently to employment termination payments resulting from domestic employment. The treatment of these payments reflects the existing treatment of exempt non-resident foreign termination payments and exempt resident termination payments as contained in the ITAA 1936. · As discussed previously, essentially, section 83-235 requires that for a payment to be tax-free as a foreign termination payment it must be received in consequence of the termination of the taxpayer's employment in a foreign country and that the payment relates only to a period employment when the person was a non-resident of Australia. · Former subsection 27A(3) of the ITAA 1936 further states that: A reference in the definitions of eligible termination payment , exempt resident foreign termination payment and exempt non-resident foreign termination payment in subsection (1) to a payment made in respect of a taxpayer is a reference to a payment made (whether voluntarily, by agreement or by compulsion of law): (a) during the life of the taxpayer: (i) to or for the benefit of the taxpayer; (ii) to or for the benefit of a dependant of the taxpayer; or (iii) to another person at the direction or request of the taxpayer; or (b) after the death of the taxpayer - to the trustee of the estate of the taxpayer. (emphasis added) · Therefore 'a payment received by the taxpayer' under section 83-235 of the ITAA 1997 should be interpreted with consideration to former subsections 27A(3) of the ITAA1936 and include a foreign termination payment made to the trustee of the estate of the taxpayer after the death of the taxpayer. Consequently, in interpreting the conditions in section 83-235 of the ITAA 1997, it is considered the requirements under this section have been satisfied as the payment has been confirmed as being related solely to a period of the terminated employment during which the taxpayer was not a resident of Australia and not related to any Australian service period. Accordingly, the amount will be paid to the Estate is not an ETP as it failed to satisfy the conditions under paragraphs 83-130(1)(b) and 83-130(1)(c) of the ITAA 1997. The amount will instead be a foreign termination payment which is tax free and is not assessable income and not exempt income. | Detailed Reasoning - Question 4 and 5: Summary The payment of the receipts under the insurance policies will finalise the C2 event under s 104-25(2) ITAA97 . | Detailed Reasoning - Capital Gains Tax: On receipt of the payments under the life insurance policies to the Estate CGT event C2 in section 104-25 ITAA 97 will occur. Section 6-10 of the ITAA97 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income, and are also included in assessable income. Amounts received as a lump sum are generally capital in nature and are potentially taxable as statutory income under the capital gains tax (CGT) provisions of the ITAA 97. The surrender or discharge of a life insurance policy gives rise to a CGT event (section 104-5 ITAA97- CGT event C2). However, section 118-300 ITAA97 excludes from the application of the CGT provisions certain capital gains or capital losses relating to the taxpayers interests under insurance policies in specified circumstances. Item 4 of the table in section 118-300 ITAA 97 provides that a capital gain or loss from a relevant CGT event happening in relation to a taxpayer's interest in rights under a policy of insurance on the life of an individual or an annuity instrument is disregarded if: Under subsection 118-300 (1A) ITAA97 where a trustee then makes a payment to a beneficiary in respect of the policy or instrument, any capital gain or capital loss made by the beneficiary is also disregarded. This exemption also applies where a payment of the proceeds of a life insurance policy is made by an executor of a deceased estate to a beneficiary. On payment by XXXX's to the Estate, CGT event C2 in section 104-25 happens because the rights under the policy would end. Any capital gain or loss that the Estate would make as a result of CGT event C2 happening would be disregarded under s118-300 ITAA97 because the payment under the policies would be made as a result of death.

if the payment is compensation for loss of income only (even when the basis of the calculation of the lump sum cannot be determined), or | to the extent that a portion of the lump sum payment is identifiable and quantifiable as income. This will be possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature. | the CGT event happens to a policy of insurance on the life of an individual; and | the taxpayer acquired the interest in the policy or instrument for no consideration,