Compensation payments

Payments that are made principally to compensate a person for a genuine dispute from personal injury, unfair dismissal, harassment, or discrimination will be excluded from the whole-of-income cap. A payment does not need to be made as a result of proceedings before a court to be deemed as compensation – however, you (or your employer) will need to keep evidence to show that a genuine dispute existed.

Example 5: Compensation for unfair dismissal

Julie’s employment was terminated by her employer. Julie has evidence that she was unfairly dismissed because of her strong union affiliation and disputes her termination by engaging a lawyer to act on her behalf.

The lawyer negotiates a $20,000 out-of-court settlement with Julie’s employer for unfair dismissal.

Although Julie’s complaint did not go to court, there was a genuine dispute between Julie and her employer which resulted in compensation for her unfair dismissal. Her payment of $20,000 is a compensation payment and will be subject to the ETP cap and excluded from the calculation of the whole-of-income cap.

Example 6: Compensation for harassment and discrimination

Monica’s employment was terminated in September 2015 because of alleged poor work performance. Monica feels that she was unfairly dismissed, believing that her dismissal was actually as a result of a harassment claim she lodged against her manager. She takes court action against her employer and receives a payment of $150,000. Monica has other taxable income of $100,000.

Because the payment is a result of the termination of her employment and made to compensate her for harassment and discrimination, it is subject to the ETP cap (that is, $195,000 for 2015–16) and excluded from the whole-of-income cap. As a result, the entire $150,000 of her payment is eligible for the ETP tax offset and will receive concessional tax treatment regardless of her other income.

End of example
    Last modified: 26 Jul 2016QC 26218