ATO Interpretative Decision

ATO ID 2002/322 (Withdrawn)

Superannuation

• This ATOID is withdrawn as it is a simple restatement of the law and does not contain an interpretative decision.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is an eligible termination payment exempt from tax under section 118-37 of the Income Tax Assessment Act 1997 (ITAA 1997) as compensation for wrong or injury suffered in a person's occupation?

Decision

No. Section 118-37 of the ITAA 1997 only exempts the payment from being taxed as a capital gain.

Facts

As a result of the circumstances surrounding the termination of his employment, the taxpayer suffered damage to his reputation, credibility and future employment prospects.

The taxpayer also developed physical symptoms associated with the termination of his employment.

The taxpayer and employer subsequently entered into a Deed of Release to settle all claims the taxpayer may have arising out of the employment or termination of employment. The taxpayer received an eligible termination payment as settlement.

Reasons for Decision

The general exemptions provisions from capital gains tax (CGT) are found in subdivision 118-A of the ITAA1997. Included amongst them is an anti-overlap provision, section 118-20, which ensures that an amount cannot be assessable under both the CGT provisions and non CGT provisions. The effect of the provision is to reduce the amount of any assessable capital gain by any amount which is also assessable under non CGT provisions and by amounts which are exempt income.

Section 118-22 is a related section, which recognises that a CGT event could give rise to an ETP as well as a capital gain. It says, that where part of an ETP is assessable under a non CGT provision, then, for the purposes of giving effect to section 118-20, the whole of that ETP is treated as if it had been assessable under the non CGT provision.

Section 118-37 contains an exemption, from CGT, for an amount received as compensation or damages for any wrong or injury suffered in a person's occupation.

In AAT Case 20/97; No 11 722; 97 ATC 258; 35 ATR 1114 a taxpayer negotiated a settlement with their former employer after lodging an application with the Queensland Industrial Relations Commission for wrongful dismissal. In considering the application of the predecessor provision of section 118-37 to the payment Senior Member Dwyer stated:

'I accept Mr Gibb's submission that if a payment is caught, as I am satisfied it is, by s 27A(1), there is no advantage to the applicant in the fact that it would have been exempt by virtue of s 160ZB(1), if it were not so caught. Further, I agree that because of the difference in the terminology s 160ZB(1) provides a wider exemption from capital gains tax than the exclusion from taxable income of that part of an eligible termination payment which is "consideration of a capital nature for, or in respect of, personal injury to the taxpayer": s 27A(1)(n). For that reason the Ruling dealing with s 160ZB(1) is not relevant to the construction of the term "consideration for or in respect of personal injury" in para 27A(1)(n).'

Accordingly, even though the payment is exempt from being taxed as a capital gain it is assessable as an ETP.

Year of income:  Year ended 30 June 2001 Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   Section 118-20
   Section 118-22
   Section 118-37
   Paragraph 118-37(1)(a)

Case References:
AAT CASE 20/97 No 11,722
   35 ATR 1114
   97 ATC 258

Related Public Rulings (including Determinations)
TR 95/35
IT 2424

Keywords
Eligible termination payment
ETP exemptions and exclusions
ETP CGT exempt component
ETP invalidity payments

Business Line:  Superannuation

Date of publication:  28 March 2002

ISSN: 1445-2782