Private ruling: Proceeds of foreign life policy
Published: April 2012
Ruling period: Year ending 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are the proceeds of a foreign life policy paid to you as executor of your late spouse's estate assessable as a death benefit termination payment? | A1: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-130. | Income Tax Assessment Act 1997 Subsection 82-130(1). | Income Tax Assessment Act 1997 Paragraph 82-130(1)(a). | Income Tax Assessment Act 1997 Subparagraph 82-130(1)(a)(i). | Income Tax Assessment Act 1997 Paragraph 82-130(1)(b). | Income Tax Assessment Act 1997 Paragraph 82-130(1)(c). | Income Tax Assessment Act 1997 Section 82-135. | Income Tax Assessment Act 1997 Subsection 82-135(e). | Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision: Detailed Reasoning - Summary:: The payment you received is an death benefit employment termination (DBTP) payment as: Ÿ you received the payment after your spouse's death, in consequence of the termination of your spouse's employment; and Ÿ the payment is received no later than 12 months after termination; and Ÿ no part of the payment is a payment that would be excluded from being an employment termination payment. The tax free component is not assessable income and is not exempt income. The taxable component is included, in full, as assessable income. Where a DBTP is paid to a dependant, the taxable component of the DBTP is tax free for amounts below the employment termination payment cap of $165,000 for the 2011-2012 income year and at the top marginal rate for the amount above this cap. | 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 of the ITAA 1997. Subsection 82-130(1) of the ITAA 1997 states that: 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 that termination (but see subsection (4)); and (c) it is not a payment mentioned in section 82-135. An employment termination payment, where the payment is made after another person's death, is known as a death benefit termination payment (subsection 82-130(3) of the ITAA 1997). To determine if the payment you received, as executor of your late spouse's estate, from a life insurance policy (the Policy) is an employment termination payment all the conditions in section 82-130 of the ITAA 1997 will need to be satisfied. Failure to satisfy any of the conditions will result in the payment not being considered an employment termination payment. | Detailed Reasoning - Paid as a consequence of the termination of employment: It should be noted that the phrase 'in consequence of the termination of your employment' is not defined in the legislation. However, both the Courts and the Commissioner have considered the meaning of this phrase. In light of these decisions, the Commissioner discusses the meaning of the phrase in 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 phrase 'in consequence of' (TR 2003/13). 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 ). In Reseck Justice Gibbs stated: Within the ordinary meaning of the words, a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination ... It is not in my opinion necessary that the termination of the services should be the dominant cause of the payment ... (bold emphasis added) While Justice Jacobs stated: It was submitted that the words 'in consequence of' import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a 'following on'. In looking at the phrase 'in consequence of' the Full Federal Court in McIntosh considered the decision in Reseck . Justice Brennan considered the judgments of Justice Gibbs and Justice Jacobs in Reseck and concluded that their Honours were both saying that a causal nexus between the termination and payment was required, though it was not necessary for the termination to be the dominant cause of the payment. 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. Furthermore, in Le Grand v. Federal Commissioner of Taxation [2002] FCA 1258; (2002) 124 FCR 53; (2002) 195 ALR 194; (2002) 2002 ATC 4907; (2002) 51 ATR 39 ( Le Grand ), the issue before the Federal Court was whether an amount received by the applicant as a result of accepting an offer of compromise in respect of claims brought by him against his former employer, in relation to the termination of his employment was in whole, or in part, an ETP. It was held that a settlement payment for litigation in relation to a taxpayer's dismissal was an ETP. Justice Goldberg stated: I am satisfied that there is a sufficient connection between the termination of the applicant's employment and the payment to warrant the finding that the payment was made 'in consequence of the termination' of the applicant's employment. I am satisfied that the payment was an effect or result of that termination in the sense that there was a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment. True it is that the payment was made not only to settle the applicant's claim for common law damages for breach of the employment agreement but also for statutory damages ... Justice Goldberg concluded that the test for determining when a payment is made in consequence of the termination of employment is that which was articulated by Justice Gibbs in Reseck . Thus, for the payment to have been made in consequence of the termination of employment, the payment must follow as an effect or result of the termination of employment. As earlier stated in paragraph 6 of TR 2003/13, there must be 'a causal connection between the termination and the payment even though the termination need not be the sole or dominant cause of the payment'. The Full Federal Court in Dibb v. Federal Commissioner of Taxation [2004] FCAFC 126; (2004) 207 ALR 151; (2004) 2004 ATC 4555; (2004) 55 ATR 786, has applied the above decisions in finding that the payment received by the taxpayer under a Deed of Release to settle various causes of action against the employer following the termination of employment was an ETP. The Commissioner states in paragraph 31 of TR 2003/13: It is clear from the decision in Le Grand, that when a payment is made to settle a claim brought by a taxpayer for wrongful dismissal or claims of a similar nature that arise as a result of an employer terminating the employment of the taxpayer, the payment will have a sufficient causal connection with the termination of the taxpayer's employment. The payment will be taken to have been made in consequence of the termination of employment because it would not have been made but for the termination. The essence of this analysis is that if the payment follows as an effect or a result of 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. The termination of the payment need not be the sole or dominate cause of the payment. The question of whether a payment is made in consequence of the termination of employment is determined by the relevant facts and circumstances of each case. From the facts provided, your late spouse was employed by a company incorporated overseas (the Company). The Company is the policy owner of a life insurance policy (the Policy). Under the Policy there was a specific personal life cover for your late spouse. Your late spouse requested that the Company related entitlements payable upon their death be paid to you as executor of your late spouse's Will. Your late spouse subsequently passed away and the proceeds of the Policy were paid to you as the executor of your late spouse's estate in the 2010-11 income year. The Company, as the owner of the Policy, was legally entitled to the proceeds of the Policy. As such, there would not have been any legal obligation for the Company to pass this payment on. However, in accordance with your late spouse's wishes, the Company chose to instruct to pay the proceeds of the Policy directly to you as the executor of your late spouse's estate. Notwithstanding that, in reality, the payment was made directly from the insurer to you as the executor of your late spouse's estate, from an income tax perspective, there were two transactions. Firstly, the proceeds of the Policy were payable to the policy owner, the Company. The second transaction is a payment from the Company to you as the executor of your late spouse's estate. It is clear that the payment was made to you, as the executor of your late spouse's estate, in consequence of the termination of your late spouse's employment with the Company as a result of their untimely death. Although the termination of your late spouse's employment is not the sole or dominant cause of the payment, there is a causal connection between the termination of your late spouse's employment upon their death and the payment. Consequently, it is clear that the payment is made in consequence of the termination of your late spouse's employment. The termination of employment and the payment are all intertwined and connected. Because the payment is considered to be received in consequence of the termination of your late spouse's employment the requirement under subparagraph 82-130(1)(a) of the ITAA 1997 has been met. | Detailed Reasoning - The payment is received no later than 12 months after termination: The second condition is stated under 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 the payment is covered by a determination exempting them from the 12 month rule. In this case, the payment is made within 12 months after the termination of employment. Therefore, the requirement of paragraph 82-130(1)(b) of the ITAA 1997 has been satisfied. | Detailed Reasoning - Not a payment mentioned in section 82-135 of the ITAA 1997: Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. These include (among others): Ÿ superannuation benefits; Ÿ unused annual leave or long service leave payments; Ÿ foreign termination payments covered under Subdivision 83-D of the ITAA 1997; and Ÿ the tax free part of a genuine redundancy payment or an early retirement scheme payment. The payment received by you is not a payment that would be excluded from being an employment termination payment. As all the conditions in section 82-130 of the ITAA 1997 have been satisfied the payment is an employment termination payment. Further, as the payment is made after another person's death, it is a death benefit termination payment. | Detailed Reasoning - Tax Treatment of the payment as a Death Benefit Termination Payment (DBTP):: A death benefit termination payment will comprise of the following components: Ÿ Tax free component - this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and Ÿ Taxable component - the amount remaining after deducting the tax free component from the total payment. The tax free component is not assessable income and is not exempt income. The taxable component is included, in full, as assessable income and is subject to tax depending on the whether it is paid to a dependant or non-dependant of the deceased. Subsection 302-195(1) of the ITAA 1997 defines a death benefits dependant and states: A death benefits dependant, of a person who has died, is: (a) the deceased person's spouse or former spouse; or (b) the deceased person's child, aged less than 18; or (c) any other person with whom the deceased person had an interdependency relationship under section 302-200 just before he or she died; or (d) any other person who was a dependant of the deceased person just before he or she died. Where a DBTP is paid to a dependant, the taxable component of the DBTP is tax free for amounts below the employment termination payment cap of $165,000 for the 2011-2012 income year and is subject to tax at the top marginal rate for the amount above this cap.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Under the Policy there was a specific personal life cover for your late spouse. The Policy also includes a key man life cover. | Your late spouse passed away in the 2010-11 income year. | Your late spouse was residing in Australia at the time of their death.