Edited version of your private ruling

Authorisation Number: 1012568884575

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Ruling

Subject: Payment made under a Deed of Agreement and Release

Question

Is the payment of $Y made under a Deed of Agreement and Release an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011.

Relevant facts and circumstances

1. During the relevant income year, your client commenced employment with an employer (the Employer).

2. A dispute arose between your client and the Employer shortly after their employment commenced. Your client claimed that:

a) The Employer and the Employer's associated entities had engaged in conduct that amounted to a breach of contract, misleading and deceptive conduct and/ or breaches of the general protection provisions of the Fair Work Act 2009, and

b) As a result of this conduct, your client suffered actionable loss (including pain and suffering, stress and humiliation, current and future loss of professional standing and dislocation of life), entitling them to compensation and/or other relief.

3. The Employer denied the allegation and subsequently commenced proceedings against your client in the Supreme Court of the relevant state. The Employer obtained an interim injunction restraining your client from disclosing or using certain confidential information.

4. The parties agreed to resolve all issues in dispute and during the relevant income year the parties executed a Deed of Agreement and Release between the Employer and its associated entities and your client.

5. The Deed provided for the following payments

i. 'X' (gross) representing an employment termination payment following your client's resignation from employment;

ii. 'Y' (gross) representing settlement of the allegations your client raised against the Employer. The settlement includes your client's claims for general damages for pain and suffering, dislocation of life and damage to professional reputation; and

iii. An amount representing your client's unused annual leave entitlements.

6. The payment was made within the relevant income year which was within seven days of the Deed execution date.

7. Your client's employment was terminated on the date the Deed was executed by reasons of resignation.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Section 80-50.

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Subsection 82-130(1).

Income Tax Assessment Act 1997 Subparagraph 82-130(a)(i).

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 15-2

Reasons for decision

Summary

The payment made to your client under the Deed of Agreement and Release is an employment termination payment as all the conditions have been satisfied.

Detailed reasoning

Employment termination payment

1. 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.

2. Subsection 82-130(1) of the ITAA 1997 declares:

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 (discussed below)

3. The above three conditions need to be satisfied in order for the payment to be treated as an employment termination payment.

4. Failure to satisfy any of the three conditions will result in the payment not being considered an employment termination payment.

Termination of employment

5. The phrase 'in consequence of termination of employment' in subparagraph 82-130(a)(i) of the ITAA 1997 above is not defined in the legislation. However, the courts have considered the meaning of the words 'in consequence of' in relation to eligible termination payments (ETPs), the predecessor of employment termination payments.

6. Of note are the decisions made by the Full 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).

7. 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.

8. The Commissioner in Taxation Ruling TR 2003/13 considered the phrase 'in consequence of' as interpreted by the Courts. 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.

9. The arrangement presented in the Deed of Agreement and Release between your client and the Employer is twofold. Firstly, the agreement awarded your client a settlement payment of $Y which covered both dispute resolution and general damages. Secondly, the agreement incorporated the termination of your client's employment, effective on the execution date of the Deed.

10. It is therefore necessary to consider whether the agreement would have been reached had your client not resigned from their position with the Employer. From the facts it is clear that your client's resignation was an element of the agreement. As such, it is reasonable to consider that but for your client's resignation, the parties would not have been able to satisfy the requirements in the Deed of Agreement and Release and therefore your client would not have received the settlement payment of $Y.

11. Therefore even though it could be argued that the settlement payment resulted from court proceedings rather than the termination of employment, there is enough evidence of a causal relationship to determine that the payment of $Y was made in consequence of your client's termination of employment. As such, the requirement under subparagraph 82-130(1)(a)(i) is satisfied.

Payment received no later than 12 months after the termination

12. The second requirement under section 82-130 of ITAA 1997 is that the payment be made within12 months of the termination of employment.

13. Your client's effective resignation date was the Deed execution date. As this payment was made within seven days of this date, this requirement is satisfied.

Employment termination payment exclusions

14. Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments. You have referred to the exemption pursuant to paragraph 82-135(i) of the ITAA 1997 which states the following:

(i)  a capital payment for, or in respect of, personal injury to you so far as the payment is reasonable having regard to the nature of the personal injury and its likely effect on your capacity to derive income from personal exertion (within the meaning of the definition of income derived from personal exertion in subsection 6(1) of the Income Tax Assessment Act 1936 );

15. The term 'personal injury' appears in various sections of both the ITAA 1936 and the Income Tax Assessment Act 1997 (ITAA 1997) and in section 136 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) but is not defined in any of these Acts.

16. However, the courts have considered the meaning of 'personal injury' in relation to eligible termination payments (ETPs), the predecessor of employment termination payments. In considering the meaning of personal injury for the purpose of the paragraph (n) exclusion, the AAT has cited Graham v Robinson [1992] 1 VR 279 (Graham v. Robinson), in both Case 11,722 and McMahon v FC of T [1999] AATA 5; (1999) 41 ATR 1056; (1999) 99 ATC 2025 (McMahons Case), and held that personal injury does not extend beyond physical injury or mental illness.

17. The Victorian Supreme Court had to decide if emotional hurt (ie hurt, distress, public scandal, hatred, odium, ridicule and contempt) was a personal injury in its decision in Graham v. Robinson, where Smith J stated at 281:

In the absence of express authority, I have come to the conclusion that the expression personal injury does not extend beyond physical injury and mental illness to include emotional hurt. I am encouraged to this view by the fact that the law has rejected grief or sorrow as a form of injury which can be relied on to mount a claim in negligence: Mount Isa Mines Ltd. v. Pusey  (1970) 125 CLR 383, at p. 394 and Jaensch v. Coffey  (1984) 155 CLR 549, at p. 587. It is true that damages are awarded for pain and suffering in the typical personal injury case. They are awarded, however, where pain and suffering flow from and are connected with physical or mental injury and may therefore be said to be damages in respect of personal injury.

18. Flowing from these decisions, it can be said that there are three types of injury a person can receive:

(a) behavioural injury - one that involves physical injury (internal and/or external) and/or mental injury that is clearly discernible to a qualified medical practitioner;

(b) non-behavioural injury - hurt, distress, anxiety, etc., that flows from the death of, or serious injury to, a relative or close friend; wrongful dismissal; defamation; etc. This type of injury may have legal remedies under the law of torts (e.g., defamation, slander), statute (e.g., sexual harassment, discrimination), or contract (e.g., employment, professional negligence); and

(c) property injury - damage to a persons property.

19. Notwithstanding it may be said all three types of injury may be personal, it is considered only behavioural injury falls within the meaning of the term personal injury as used in the paragraph (i) exclusion.

20. The decision in Graham v. Robinson was applied in McMahons Case in relation to a payment for alleged damage to a taxpayer's reputation. In McMahons Case, a critical performance appraisal of McMahon and other comments were published in the media. Subsequent to this, McMahons employment was terminated and it was agreed to pay him certain amounts including an amount for the alleged damage to his reputation. Senior Member Block stated:

26 The tribunal also notes the stipulation in the concluding portion of s27A(1)(n) of the ITAA 1936 that the amount of consideration for personal injury is to be regarded as an ETP only to the extent that it is reasonable having regard to the nature of the injury and the taxpayers capacity to derive income from personal exertion. The tribunal considers that the inclusion by the legislature of the words from personal exertion tends to confirm that the section is intended to exclude from the definition of ETP payments in respect of injuries to the person, where such injuries being physical injuries or mental illnesses which have an assessable and identifiable impact on the capacity of the taxpayer to earn income. The tribunal considers in summary that an injury to person is distinguishable from an injury to a persons reputation.

27 For the Reasons set out previously (and bearing in mind that the decision in Graham v. Robinson is binding on the tribunal), the reputation payment was not made in respect of personal injury within s27A(1)(n) of the ITAA 1936; accordingly the reputation payment was correctly assessable as an ETP.

21. To reiterate, for an amount to be excluded from the definition of an ETP by virtue of paragraph (i), there must be a behavioural type personal injury.

22. In your client's case, the injury for which part of the settlement payment covered was non-behavioural as it related to general pain and suffering, dislocation of life and damage to their professional reputation. As such, it is not considered a personal injury for the purposes of the paragraph (i) exclusion.

23. The other exemptions listed in section 82-135 do not apply to your client's case. As such, the requirement under paragraph 82-130(1)(c) is satisfied.

Conclusion

24. As all of the conditions have been satisfied, the settlement payment for $Y is considered an employment termination payment and the tax withheld from the payment by the Employer has been in accordance with the ETP withholding requirements.

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