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Edited version of your written advice
Authorisation Number: 1012914929289
Date of advice: 23 November 2015
Ruling
Subject: Employment termination payment
Question
Is the lump sum payment paid to your client by their former employer in settlement of an unfair dismissal claim 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 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
Your client commenced employment with their former employer in the 19XX-XX income year.
Your client was dismissed by their former employer in the relevant income year.
After their dismissal, your client pursued reinstatement and commenced unfair dismissal proceedings (the Proceedings) with the Fair Work Commission.
Your client and their former employer entered into a Settlement Agreement in the relevant income year, which stipulated the following:
The parties agree that in full and final settlement of the matter and all claims arising out of the employment of the Applicant by the Respondent, its termination and the unfair dismissal proceedings commenced by the Applicant…
3. The Applicant agrees to take no further action in relation to circumstances surrounding this matter and will discharge and release the Respondent, its Employees and Directors, from any liability past, present or future from all claims, actions or proceedings arising out of the employment of the Applicant by the Respondent, its termination and the Proceedings.
8. The Applicant is to file a Notice of Discontinuance in the Fair Work Commission upon receipt of the settlement monies and the provision of the Statement of Service.
9. The Respondent will provide the Applicant with a Statement of Service which shall affirm that the Applicant ceased employment due to resignation.
Your client received a settlement sum in the relevant income year.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 82-130
Income Tax Assessment Act 1997 Subparagraph 82-130(1)(a)(i)
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 Section 82-135
Income Tax Assessment Act 1997 Subdivision 83-D
All references are to the ITAA 1997 unless otherwise indicated.
Reasons for decision
Summary
The lump sum payment paid to your client by their former employer is an employment termination payment and is included in their assessable income in the relevant income year.
Detailed reasoning
A person's assessable income consists of ordinary income and statutory income. An amount is statutory income if it is not ordinary income and is included in assessable income by a provision of the Income Tax Assessment Act 1936 or the ITAA 1997.
Employment termination payment
A payment is an employment termination payment 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 employer termination payments. These include (among others):
• superannuation benefits
• unused annual leave or long service leave payments
• foreign termination payments covered under Subdivision 83-D and
• the tax-free part of a genuine redundancy payment or an early retirement scheme payment.
Lump sum payment
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) sets out the Commissioner's views on when a payment is made 'in consequence of' termination of employment. Paragraphs 5 and 6 of TR 2003/13 state:
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.
Whether payments made in respect of a taxpayer as a result of settlement of litigation arising out of the termination of the taxpayer's employment, is made 'in consequence of' the termination of employment is specifically addressed in TR 2003/13. According to paragraph 31 of TR 2003/13:
31. It is clear from the decision in Le Grand, that when a payment is made to settle a claim brought by a taxpayer for wrongful dismissal or claims of a similar nature that arise as a result of an employer terminating the employment of the taxpayer, the payment will have a sufficient causal connection with the termination of the taxpayer's employment. The payment will be taken to have been made in consequence of the termination of employment because it would not have been made but for the termination.
A lump sum amount was paid to your client in the subsequent income year in part to settle the unfair dismissal proceedings initiated by your client against their former employer in the Fair Work Commission.
As reiterated in the Agreed Terms of Settlement, this lump sum amount was paid in full and final settlement of all claims arising out of your client's employment with their former employer, the termination of employment and the unfair dismissal claim.
The payment was made 'in consequence of' the termination of your client's employment. There is a causal connection between the termination and the payment of the settlement sum. The termination, the unfair dismissal proceedings and the payment are intertwined.
Therefore, the lump sum payment was made in consequence of the termination of employment as defined in subparagraph 82-130(1)(a)(i).
This amount was paid to your client within 12 months of their termination (thereby satisfying paragraph 82-130(1)(b)).
Further, there is no evidence to show that the payment is a payment specifically excluded under section 82-135 (thereby satisfying paragraph 82-130(1)(c)).
Accordingly, the lump sum payment paid to your client by their former employer is an employment termination payment under section 82-130 and is included in their assessable income in the subsequent income year.
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