Private ruling: Employment termination payments - 12-month rule determination
Date of advice: 6 July 2023
Published: 21 August 2023
Ruling period: Year ended 30 June 2023
Date scheme commenced: 3 February 2020

Ruling: Q1: Is the payment received by the Client in the 2022-23 income year ("the Payment") an employment termination payment in accordance with section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will the Commissioner determine that the 12-month rule does not apply to the Payment made to the Client, under section 82-130(4) of the ITAA 1997? | A2: No.

Relevant facts and circumstances: The Client commenced working for the Employer in the 2012-13 income year. You advised that the Client attended a hospital in early 2020, where they were diagnosed with a health condition. You advised that the Client took a medical leave of absence from work the day after attending the hospital. You advised that the Client was still technically employed and entitled to leave and other employment-related payments. A copy of a doctor's report dated mid-2022 details that the Client first consulted with their general practitioner (GP) the day after attending the hospital. You advised that the Client started receiving income protection from the Insurer from early 2020. A copy of a doctor's letter dated late 2020 ("the Letter") states that the Client had been referred to a medical practitioner by their general practitioner in mid-2020 under the Client's health plan. This letter states that the Client's first appointment took place in mid-2020. The Letter also stated that the Client had two additional consults in late 2020. The medical practitioner stated that the Client was not fit to return to usual duties at this time and that returning to the Employer would be 'likely to exacerbate their symptoms.' You advised that, in mid-2021, the Employer requested a report from the Client's general practitioner and the medical practitioner on whether the Client would be able to return to work. You advised that this report indicated that the Client would not return to working for the Employer. You advised that the Employer terminated the Client's employment in mid-2021, and paid the Client a redundancy package. You advised that the Client's income protection from the Insurer ceased in early 2022. You advised that the Client requested an application for a Total and Permanent Disablement (TPD) claim from the Insurer in early 2022, on the advice of a former colleague. You advised that the Client's claim was submitted in mid-2022, and you advised that this was because the Client had to provide paperwork completed by their GP and their medical practitioner and due to the Client's health. You have provided a copy of a letter addressed to the Client from the Insurer dated mid-2022 ("the mid-2022 letter"), stating that the claim forms had been completed. This letter states the Client's policy details, including a benefit amount and a waiting period of 6 months. The mid-2022 letter advises that the Insurer will arrange for an independent medical examination for the Client, as the Insurer's policy requires that two medical practitioners to certify the Client as Totally and Permanently Disabled. You have provided a copy of a letter addressed to the Client from the Insurer dated mid-2022, which states that an appointment has been arranged with a medical practitioner for mid-2022. You have provided a copy of a medical report from an independent medical examiner, dated mid-2022 ("the Report"). This report states that a psychiatric assessment was conducted on the Client on mid-2022. The Report states the Client has no current capacity or fitness for work. The medical practitioner does not believe that the Client will be capable of returning to work in the future because of the ongoing, chronic nature of their symptoms and their condition is likely to be permanent. You advised that the Client's TPD application was accepted in late 2022. You have provided a copy of a letter from the Employer to the Client dated late 2022, where the Employer states that the delay in making the TPD Payment to the Client was due to the Employer receiving external advice and consulting with the Insurer to limit the financial impact on the Client ("Employer's Letter"). You advised that the TPD policy was held by the Employer and they received the payment (the Payment) from the Insurer, who then made the Payment to the Client. You also advised that the Employer was instructed that, because the Payment was made to the Client more than 12 months after termination, that the Employer treated the Payment as ordinary income and not as an employment termination payment. The Payment was made in late 2022. You have provided a copy of a document which states that the total amount that the Client received from the Insurer, and the tax that was applied, leaving a net payment.

Relevant legislative provisions: Income Tax Assessment Act Section 82-130. | Income Tax Assessment Act Subsection 82-130(1). | Income Tax Assessment Act Paragraph 82-130(1)(a). | Income Tax Assessment Act Paragraph 82-130(1)(b). | Income Tax Assessment Act Paragraph 82-130(1)(c). | Income Tax Assessment Act Subsection 82-130(4). | Income Tax Assessment Act Subsection 82-130(5). | Income Tax Assessment Act Subsection 82-130(7). | Income Tax Assessment Act Section 82-135.

Reasons for decision: Summary: The Payment received the Client in the 2022-23 income year is not an employment termination payment. The Commissioner has not determined that the 12-month rule does not apply to the Payment. | Detailed Reasoning - Detailed reasoning: Employment termination payments (ETPs) are defined in subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as follows: 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. Therefore, to be considered an 'employment termination payment', a payment must be received by the taxpayer in consequence of the termination of their employment, be received no later than 12 months after that termination, and not be included under section 82-135 of the ITAA 1997. | Detailed Reasoning - Received no later than 12 months:: Of relevance to this case is paragraph 82-130(1)(b) of the ITAA 1997 which states that for a payment to be an employment termination payment it must be received no later than 12 months after that termination. The policy objective underlying the 12-month rule is detailed in the explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 : 4.19 The 12-month rule exists to prevent abuse of the tax concession offered for these payments by using a series of payments over a number of income years. The provisions dealing with the Commissioner's ability to issue a determination are provided to allow flexibility where delays in payment are reasonable and not constructed with the intent of delivering taxation advantages. In this case, the Client's employment was formally terminated in mid-2021 and the payment was made in late 2022. Therefore, more than 12 months had lapsed between the Client's termination of employment and the receipt of the payment. Subsection 82-130(4) of the ITAA 1997 provides an exemption from the 12 month states: Paragraph (1)(b) does not apply to you if: (a) you are covered by a determination under subsection (5) or (7); or (b) the payment is a genuine redundancy payment or an early retirement scheme payment. Note: The part of a genuine redundancy payment or an early retirement scheme payment worked out under section 83-170 is not an employment termination payment: see section 82-135 . Subsection 82-130(5) of the ITAA 1997 states: The Commissioner may determine, in writing, that paragraph (1)(b) does not apply to you if the Commissioner considers the time between the employment termination and the payment to be reasonable, having regard to the following: (a) the circumstances of the employment termination, including any dispute in relation to the termination; (b) the circumstances of the payment; (c) the circumstances of the person making the payment; (d) any other relevant circumstances. Subsection 82-130(7) of the ITAA 1997 states: The Commissioner may, by legislative instrument, determine that paragraph (1)(b) does not apply to either or both of the following, as specified in the determination: (a) a class of payments; (b) a class of recipients of payments. The following facts are considered relevant for the Client's case: • The Client took a medical leave of absence from work with the Employer in early 2020. • The Client's employment with the Employer was terminated in mid-2021, after having received a report from the Client's medical practitioners that the Client would likely not be able to return to work for the Employer. • The Client was unaware of the TPD insurance attached to their employment contract until early 2022. The Client applied under this TPD policy in early 2022. • The Client submitted the application for the Payment in mid-2022. You have stated that this was because the Client had to include paperwork completed by their medical practitioners and their health. • The mid-2022 letter stated that the Payment waiting period is 6 months. • The mid-2022 letter stated that an independent medical examination would be required, and that this would be organised by the Insurer. • The Employer's Letter states that the Employer was delayed in making the Payment to the Client, which was approved in late 2022, because the Employer was receiving external advice and consulting with the Insurer. The Client's employment was terminated in mid-2021. The Client finalised his application for the Payment in mid-2022, which was 12 months after termination of their employment with the Employer. In this case, the payment is not a genuine redundancy payment or an early retirement scheme payment. Further, the Commissioner will not make the determination that the 12-month rule in paragraph 82-130(1)(b) of the ITAA 1997 will not apply to the Client under subsection 82-130(4) of the ITAA 1997. As the Payment was not made within 12 months of the Client's termination, and because the determination has not been made, the Payment does not meet the definition of an employment termination payment under subsection 82-130(1) of the ITAA 1997.