Private ruling: Death benefit termination payment and deemed dividend
Published: March 2014
Ruling period: The year ending 30 June 2014 | The year ending 30 June 2015.
Date scheme commenced: 1 July 2013.

Ruling: Q1: Is the amount proposed to be paid by the unit trust to the taxpayer not assessable, non-exempt income under subdivision 82-B of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Is the amount being paid to your client by the trust a deemed dividend under section 109 of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: No.

Relevant facts and circumstances: The deceased is the late spouse of your client. The deceased commenced a business some time ago which was structured by way of a trust (Trust A). Trust A was originally owned 50% by the Trust B (with the deceased as the trustee) and 50% by an unrelated party. The trustee of the Trust A is company which was originally owned 50% by the deceased and 50% by an unrelated party. Some time ago the deceased bought out the other unrelated party to become the 100% owner of the business. As a result 100% of the units in the Trust are now held by Trust B. When the deceased passed away, your client became the sole director and shareholder of the trustee company of Trust A and the trustee of Trust B. It is proposed that Trust A intends on authorising a payment of less than $180,000.00 to your client within 12 months from the date of the deceased passing away. The proposed payment is intended to be a death benefit termination payment in accordance with subdivision 82-B of the ITAA 1997. The amount has been determined in light of the deceased's period of service as well as their contribution to the business by way of management and earnings. The amount has been calculated on this basis allowing for the financial capacity of the business to make the payment in addition to providing assistance to your client.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-60 | Income Tax Assessment Act 1997 Section 82-65 | Income Tax Assessment Act 1997 Subsection 82-130(1) | Income Tax Assessment Act 1997 Subsection 82-130(3) | Income Tax Assessment Act 1997 Subparagraph 82-130(a)(ii) | Income Tax Assessment Act 1997 Section 82-140 | Income Tax Assessment Act 1997 Section 82-145 | Income Tax Assessment Act 1997 Section 82-150 | Income Tax Assessment Act 1997 Section 82-160 | Income Tax Assessment Act 1936 Section 109

Reasons for decision: Summary: As the payment to be made to your client after the death of your client's spouse and in consequence of the termination of their employment, it is considered that the payment is a death benefit termination payment. As the amount to be received is less than the ETP cap for the 2013-14 income year, the entire amount will be not assessable, non-exempt income under subdivision 82-B of the ITAA 1997. As the trustee company of Trust A is acting as a trustee of a trust and not as a private company, section 109 of the ITAA 1936 will not apply. | 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. 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 If the above three conditions are satisfied, the payment will be treated as an employment termination payment. | Detailed Reasoning - In consequence of employment: The first condition requires that there is: • a payment; • received by you; and • in consequence of the termination of either; n your employment; or n another person's employment after their death. The phrase 'in consequence of termination of employment' in subparagraph 82-130(a)(i) of the ITAA 1997 above is not defined in the legislation. However, the courts have considered the meaning of the words 'in consequence of' in relation to eligible termination payments (ETPs), the predecessor of employment termination payments. Of note are the decisions made by the Full 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 ). Suffice it to say that 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. The Commissioner in Taxation Ruling TR 2003/13 considered the phrase 'in consequence of' as interpreted by the Courts. 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. Following the death of your client's spouse, their employment was terminated. According to the facts, your client will receive a payment less than $180,000.00 determined based on the deceased's period of service and their contribution to the business by way of management and earnings. It is also intended to provide sufficient assistance to your client. Therefore based on the principles stated in Reseck and other cases, and the Commissioner's views expressed in TR 2003/13, the facts presented demonstrate a clear connection exists between the termination of deceased's employment and the payment. Your client would not otherwise have received the payment except for the termination of their spouse's employment upon death. Consequently, the payment is considered to be in consequence of the termination of the deceased's employment. Further, once the payment is received by your client it will then satisfy all the requirements of paragraph 82-130(1)(a) of the ITAA 1997. | Detailed Reasoning - The 12 month rule: To qualify as an employment termination payment, the payment must be received no later than 12 months after the termination of the taxpayers employment (paragraph 82-130(1)(b) of the ITAA 1997). You advised that the payment will be received within 12 months of the deceased passing away. As the payment will be made within 12 months of the employment being terminated, the requirement under paragraph 82-130(1)(b) of the ITAA 1997 will be satisfied. | Detailed Reasoning - Exclusions: The condition specified in paragraph 82-130(1)(c) of the ITAA 1997 is that an employment termination payment does not include a payment mentioned in section 82-135 of the ITAA 1997. Section 82-135 of the ITAA 1997 includes, but is not limited to, amounts received that are: • superannuation benefits; • pension or annuity payments; • foreign termination payments; • unused annual leave and unused long service leave; and • the tax-free part of genuine redundancy payments or early retirement scheme payments. In this case, the payment described does not resemble any of the payments mentioned in section 82-135 of the ITAA 1997. As such, the condition pertaining to paragraph 82-130(1)(c) of the ITAA 1997 is satisfied. As all of the conditions have been satisfied, the payment your client will receive is considered to be an employment termination payment. | Detailed Reasoning - Death benefit termination payment: Subsection 82-130(3) of the ITAA 1997 states: A death benefit termination payment is an employment termination payment to which subparagraph (1)(a)(ii) applies. As the payment is being received after the death of your client's spouse and in consequence of the termination of their employment, it is considered that subparagraph 82-130(1)(a)(ii) of the ITAA 1997 applies in this case. As such, it is considered that the payment amount is also a death benefit termination payment (DBTP) as defined under subsection 82-130(3) of the ITAA 1997. | Detailed Reasoning - Tax Treatment of the payment as an DBTP: As the DBTP was paid by an employer rather than a superannuation fund, section 82-140 of the ITAA 1997 applies. It states an ETP is comprised of the following components: • Tax-free component this includes the pre-July 83 segment of the payment (if any) and/or the invalidity segment (if any); and • Taxable component the amount remaining after deducting the tax-free component from the total payment. Subsection 82-65 of the ITAA 1997 provides that the tax-free component of a DBTP that you receive after the death of a person whom you are a death benefits dependent is not assessable income and is not exempt income. Therefore the tax-free component does not count towards assessable (or taxable) income. Further, paragraph 82-65(2)(a) of the ITAA 1997 states that the amount of the taxable component up to the ETP cap amount for the relevant year is not assessable income and is not exempt income. However, paragraph 82-65(2)(b) of the ITAA 1997 provides that the taxable component amount exceeding the ETP cap for the relevant year is assessable income and is taxed at the top marginal rate in accordance with the Income Tax Rates Act 1986 . The period of employment to which the DBTP relates occurred after 1 July 1983 and therefore the DBTP does not have a pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997. The payment will include an invalidity segment if the requirements under section 82-150 of the ITAA 1997 are satisfied. Subsection 82-150(1) of the ITAA 1997 states that: An employment termination payment includes an invalidity segment if: (a) the payment was made to a person because he or she stops being gainfully employed; and (b) the person stopped being gainfully employed because he or she suffered from ill-health (whether physical or mental); and (c) the gainful employment stopped before the person's last retirement day; and (d) 2 legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the person can ever be gainfully employed in capacity for which he or she is reasonably qualified because of education, experience or training. As the payment will be made to your client directly it is clear that your client does not satisfy these conditions. This is because the DBTP will not be made to your client because they ceased being gainfully employed as a result of suffering from ill-health. Therefore there is no invalidity segment for the purposes of section 82-150 of the ITAA 1997. As the DBTP contains neither a pre-July 83 segment nor an invalidity segment, there is no tax-free component as defined in section 82-140 of the ITAA 1997. Rather the entire DBTP is a taxable component as defined in section 82-145 of the ITAA 1997. However, as your client was the spouse of the deceased, they are considered a 'death benefits dependent' for the purposes of section 302-195 of the ITAA 1997. As stated previously, any amounts exceeding the ETP cap for the relevant income year are taxed at the top marginal tax rate pursuant to 82-65(2)(a) of the ITAA 1997. The ETP cap for the 2013-14 income year is $180,000. As such, the entire your client will receive is not assessable and is not exempt income. | Detailed Reasoning - Question 2: Section 109 of the Income Tax Assessment Act 1936 (ITAA1936) considers excessive payments made to shareholders, directors, associates deemed to be dividends. Section 109(1) goes on to explain: If a private company pays or credits to an associated person an amount (in this subsection called the excessive amount) that is, or purports to be: (a) remuneration for services rendered by the associated person; or (b) an allowance, gratuity or compensation in consequence of the retirement of the associated person from an office or employment held by the associated person in the company, or upon the termination of any such office or employment; so much (if any) of the excessive amount as exceeds an amount that, in the opinion of the Commissioner, is reasonable: (c) is not an allowable deduction; and (d) shall, for the purposes of this Act other than Division 11A of Part III, be deemed to be a dividend paid by the company: (i) to the associated person as a shareholder in the company; (ii) out of profits derived by the company; and (iii) on the last day of the year of income of the company in which the excessive payment or credit is made. In these circumstances the company is acting as a trustee of a trust and not as the private company; consequently section 109 of the ITAA 1936 does not apply. | Detailed Reasoning - Conclusion: The amount proposed to be made to your client is considered to be a Death Benefits Termination Payment. As the amount to be received is less than the ETP cap for the 2013-14 income year, the entire amount will be not assessable, non-exempt income under subdivision 82-B of the ITAA 1997. As the company is acting as a trustee of a trust and not as a private company, section 109 of the ITAA 1936 will not apply.