Private ruling: Employment termination payment
Date of advice: 9 February 2017
Published: July 2017
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: A6: Invalid.

Relevant facts and circumstances: The employee commenced working in the late 1990s. An accident occurred in the 201X-1Y income year which resulted in the death of the employee (the deceased). The deceased was under 65 years of age at the time of death. At the time of death, the deceased's entitlements owed by the employer were as follows: (These entitlements will be paid within 12 months of the deceased's death). ● annual leave and leave loading; ● sick leave; ● time in reserve; ● accrued RDO balance; ● accrued mobility allowance. Other employees as well as subcontractors are contributing after tax funds to a bank account held by the employer. The bank account is being used solely for the collection of these funds and no other purpose. All funds contributed to this bank account will be paid directly to the spouse of the deceased. On compassionate grounds, the employer will also make an ex-gratia payment equal to the funds raised by the employees and the subcontractors to the spouse of the deceased. The employer will make this ex-gratia payment within 12 months of the deceased's death and the spouse is not required to repay this amount to the employer. The spouse of the deceased is an Australian resident for income tax purposes.

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 Subsection 82-130(1)(a) | Income Tax Assessment Act 1997 Subparagraph 82-130(1)(a)(i) | Income Tax Assessment Act 1997 Subparagraph 82-130(1)(a)(ii) | 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 Subsection 82-130(3) | Income Tax Assessment Act 1997 Subsection 82-135 | Taxation Administration Act 1953 Section 357-55 of Schedule 1 | Taxation Administration Act 1953 Section 359-5 of Schedule 1 | All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated.

Reasons for decision: Summary: The amounts representing unused annual leave and leave loading are not employment termination payments (ETPs). The remaining amount of employee entitlements is a death benefit termination payment. The proposed ex-gratia payment to be made by the employer to the spouse of the deceased is a death benefit termination payment. The Pay as you go (PAYG) withholding provisions apply to the payments made by the employer. | Detailed Reasoning - Employment termination payment: A payment is an employment termination payment (ETP) if it satisfies all the requirements in section 82-130 and is not specifically excluded under section 82-135. Subsection 82-130(1) 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 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. Section 82-135 provides that certain payments are not ETPs. Relevantly, these include (among others) unused annual leave or long service leave payments. | Detailed Reasoning - Paid 'in consequence' of the termination of employment: Taxation Ruling TR 2003/13 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) states, at paragraphs 5 and 6 that: 5. ...the Commissioner considers that 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. 6. The phrase requires 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. While TR 2003/13 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect. In this case, the facts show that the deceased's employment with the employer was terminated as a result of their death during the course of their employment. The termination of employment and the deceased's death are inextricably linked. Further, as a result of the deceased's death, the employer has agreed to pay the deceased's spouse an ex-gratia payment in addition to other employee entitlements which the employer is contractually required to make. Although the dominant cause of the ex-gratia payment is to provide the deceased's spouse with additional support it is clear that the ex-gratia payment and the termination of the deceased's employment upon their death are intertwined and connected. It is not considered that the fact that the additional payment will be made ex-gratia, in addition to the employer's statutory obligations breaks this link. In other words, the spouse of the deceased would not otherwise receive the ex-gratia payment except for the termination of the deceased's employment upon death. Consequently, the payment of the deceased's entitlements and the proposed ex-gratia payment are considered to be in consequence of the termination of the deceased's employment. Therefore, subparagraph 82-130(1)(a)(i) is satisfied. | Detailed Reasoning - Payment must be received no later than 12 months after termination: To qualify as an employment termination payment, the payment must be received no later than 12 months after the termination of the taxpayer's employment (paragraph 82-130(1)(b)). As the payment of the deceased employee's entitlements and the proposed ex-gratia payment will be made within 12 months of the deceased's death, paragraph 82-130(1)(b) will be satisfied. | Detailed Reasoning - Exclusions under section 82-135 of the ITAA 1997: Section 82-135 of the ITAA 1997 provides that certain payments are not ETPs. This includes (among others), unused annual leave and leave loading. In this case, the proposed payment of the deceased's employment entitlements includes an amount representing unused annual leave and leave loading respectively. Unused leave and leave loading falls within the exceptions in section 82-135 and accordingly these payments are not ETPs. Therefore, of the total outstanding amount of the deceased's entitlements, only the amount excluding the annual leave and leave loading is an ETP in accordance with section 82-130. The proposed ex-gratia payment is therefore also an ETP as it does not fall within any of the exclusions under section 82-135. Given part of the payment of the deceased employee's entitlement and the proposed ex-gratia payment satisfies paragraphs 82-130(1)(a), (b) and (c), these amounts are considered to be ETPs. | Detailed Reasoning - Death Benefit Termination Payment: Subsection 82-130(3) states: A death benefit termination payment is an employment termination payment to which subparagraph (1)(a)(ii) applies. As the payment of the deceased's entitlements and the proposed ex-gratia payment are being received after the deceased's death, and they are in consequence of the termination of their employment, it is considered that subparagraph 82-130(1)(a)(ii) applies in this case. In light of the foregoing, it is considered that part of the deceased's employee entitlements and the proposed ex-gratia payment are also death benefit termination payments as defined under subsection 82-130(3). | Detailed Reasoning - Question.3 and Question.5: PAYG withholding requirements differ in relation to certain payments made after the death of an employee. Payments for work or services made after the death of an employee are made to either the: ● estate of the deceased employee ● the person entitled to the money under the relevant law, industrial award or agreement. Amounts are not required to be withheld from payments for unused annual leave or long service leave paid after the death of an employee, even where these amounts are paid to the estate of the deceased employee. Similarly, where a death benefit ETP is paid to a trustee of a deceased estate no amounts are required to be withheld. Part of the question you have raised also relates to the withholding requirements (if any), of a death benefit ETP paid directly to the deceased's spouse. The employer is required to withhold at the rate of 49% on the amount of the taxable component of the ETP above the ETP cap ($195,000 for the 201X-1Y income year). There is no requirement to withhold on the tax-free amount or the taxable component up to the ETP cap amount. Please refer to Schedule 11 - Tax table for employment termination payments on our website at: www.ato.gov.au and type in QC 48968 in the search function for further information in relation to withholding rates for ETPs.

Question.1: Do any of the employee entitlements listed at item.4 of the facts, form part of a death benefit termination payment? | Question.2: Can the deceased employee's annual leave and leave loading be paid to the deceased estate and the death benefit termination payment be paid to the spouse? | Further to Question.2, are there any Pay as you go (PAYG) withholding obligations for the employer? | Question.4: Is the ex-gratia payment outlined in item.6 of the facts to be made by the employer to the employee's spouse a death benefit termination payment? | Further to Question.4, if the ex-gratia payment is a death benefit termination payment, are there any PAYG withholding obligations for the employer? | Question.6: Further to Question.4, if the ex-gratia payment is a death benefit termination payment, can the employee entitlement ETP components as determined per Question.1 be paid to the deceased estate and the ex-gratia payment be paid to the spouse?