Edited version of your written advice

Authorisation Number: 1013065520924

Date of advice: 4 August 2016

Ruling

Subject: Fringe Benefit Tax (FBT) - excluded fringe benefit - consideration of a capital nature

Question 1

Are the payments proposed to be made under the draft Deeds of Release (DoR) consideration of a capital nature for, or in respect of personal injury to a person under subparagraph (m)(ii) of the definition of a 'fringe benefit' in subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Answer

No

This ruling applies for the following periods:

Year ended 31 March 2016

Year ended 31 March 2017

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You provided the following facts to the Commissioner in your application for a private ruling:

1. The entity is an Australian Government body that was created by legislation on 1 July 2000. It took over some of the functions as well as X employees (the employees) from the other entity (the former employer).

2. On being transferred from the former employer, the employees were not paid their long service leave entitlements (LSL) that were provided for under the employment contract with the former employer. However, the employment contract with the employer mistakenly suggested that the employees' period of service with the former employer would be counted for the purposes of calculating their LSL entitlement.

3. The Australian Government Solicitor (AGS) advised that:

• on the basis that the former employer was not a Commonwealth public sector body, the period of service with the former employer does not count as service for the purpose of the Long Service Leave ( Commonwealth Employees) Act 1976 (LSL Act); and

• attempt by the employer to pay an amount under the LSL Act that is referrable to the service period with the former employer would be in breach of the Commonwealth constitution; and

• the employer is able to pay the employee a compensation payment in settlement of a potential claim by the employees, provided that there is an appropriate DoR obtained prior to the payment.

4. The employees have or may have suffered a range of emotional hurt, anxiety, depression and other mental injuries as a result of losing his/her expected entitlements.

5. The employees could commence a claim for compensation for the loss of entitlements that result from the employer having to comply with the law as advised by the AGS.

6. A draft DoR stated that, for the purpose of resolving any dispute in relation to any claim, belief or right asserted by the employees against the employer for long service leave entitlement in respect of their service with the former employer, and in relation to any emotional hurt, anxiety, depression and mental injury arising from the same, the employee has agreed to accept the payment in return for the full and final settlement of any claim capable of being brought by the employees in respect of the loss or perceived loss suffered by the employees and in consideration for giving this DoR.

7. Under the DoR the employees, in receiving the payment, agree to release the employer from all actions, claims and demands in relation to the former employer LSL period and for any emotional hurt anxiety, depression and mental injury suffered as a result of the employer's inability to recognise the LSL service period with the former employer.

8. The DoR proposed a single payment amount to be made to the employees. The DoR does not contain any detailed calculation of the proposed payment amount nor does it specifies how much of the amount is attributed to the former employer LSL period and the component specifically for the "emotional hurt anxiety, depression and mental injury suffered".

9. On dd/mm/yyyy, one of the employees was invited by the employer to undertake an Initial Needs Assessment to determine his risk of experiencing a mental injury as a direct result of the loss of their LSL entitlement. The assessment was carried out by an independent service provider. The assessment was conducted on the basis of a "theoretical workplace scenario". The objective is to understand and determine a worker's response to changing workplace circumstances and how the consequences of the changes would likely impact on their health and wellbeing. The scenario in this case was to…"consider that your entitlements to long service leave were to be altered resulting in your previous work history outside……. (the current employer) no longer contributing to your accruement of leave"

10. A clinical opinion was made based on the assessment that the employee assessed "would be at risk of experiencing a mental injury as a direct result of the loss of his leave entitlements"

Relevant legislative provisions

Fringe Benefit Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefit Tax Assessment Act 1986 Subparagraph 136(1)(m)(ii)

Income Tax Assessment Act 1936 Paragraph 27A(1)(n)

Income Tax Assessment Act 1997 Paragraph 82-135(i)

Reasons for decision

For Fringe Benefit Tax (FBT) purposes, the term 'benefit' has a broad definition and includes cash and non-cash benefits. However, to be a taxable benefit, it must be in the form of a fringe benefit which is defined in section 136(1) of FBTAA as a benefit provided to the employee or an associate of an employee by the employer, an associate of the employer or an "arranger", in respect of the employment of the employee.

However, not all benefits provided in respect of employment are taxable fringe benefits. The definition of fringe benefit in section 136(1) of the FBTAA also contains a list of payments and benefits that are excluded and thus not a fringe benefit. Under subparagraph 136(1)(m)(ii) a payment is excluded from the definition of a fringe benefit where the payment is:

_ a consideration of a capital nature;

_ for or in respect of 'personal injury' to a person

Notably in largely identical terms, a similar exclusion from the definition of an Eligible Termination Payment (ETP) is available under section 82-135(i) of the Income Tax Assessment Act 1997 (ITAA 1997) where payment made to a taxpayer as:

consideration of a capital nature for, or in respect of, personal injury to that taxpayer provided the amount is reasonable, having regard to the nature of the personal injury suffered and the likely effect of that personal injury on the capacity of the taxpayer to derive income from personal exertion.

The requirements under paragraph 82-135(i) meant that its application is more restrictive than what is required in subparagraph 136(1)(m)(ii). In addition to the requirement that the compensation must be a capital payment for personal injury, the injury must have had an effect on the person's capacity to derive income from personal exertion. Essentially, paragraph 82-135(i) of the ITAA 1997 requires a greater examination of the impact of the personal injury than that which is required in subparagraph 136(1(m)(ii) of the FBTAA.

By contrast, the requirements of subparagraph 136(1)(m)(ii) of the FBTAA are more restrictive than the requirements of subsection 118-37(1) of the ITAA 1997 as it extends to capital payments for a wrong, injury or illness.

Whether subparagraph 136(1)(m)(ii) of the FBTAA applies will turn on whether a payment made to the employees is a capital payment that is for or in respect of a personal injury to a person. It is not necessary to consider the effects of the personal injury on the person.

The Courts have established, through a number of decisions, firm principles on what is considered to be a personal injury as well as whether a payment is in respect of personal injury. These principles will be examined and applied to the arrangement being proposed under the DoR.

Personal Injury

The term 'personal injury' is not provided in the FBTAA. The Act defines the term 'injury' to mean physical or mental injury. The legislative reference to personal injury in the context of 'injury to the person' and is therefore, considered to mean an injury to the physical body as opposed to the person's property, character or reputation.

Essentially, there are three types of injury that a person can incur:

• behavioural injury - one that involves physical injury and/or mental illness. Like mental injury, some physical injuries are not obvious and in most cases expert witnesses are required to provide reports upon which the probability of the injury existing is determined that is clearly discernible to a qualified medical practitioner;

• 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). However, the general view by the Court is that injury to reputation which involves pain and suffering is not a personal injury (McMahon v FC of T 99 ATC 2025); and

• property injury - damage to a person's property.

It may be said that all three types of injury may be personal. However, it is considered that only the first type (i.e. behavioural injury) falls within the meaning of the term personal injury.

In an ETP context, the phrase 'personal injury' in paragraph 82-135(i) of the ITAA 1997 does not include emotional hurt or stress. This is based on the decision by the Victorian Supreme Court in Graham v. Robinson [1992] 1 VR 279 (Graham v. Robinson) where the Court had to decide if emotional hurt (i.e. hurt, distress, public scandal, hatred, odium, ridicule and contempt) was a personal injury. At 281, Justice Smith stated:

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.

Thereafter, in considering the meaning of personal injury for the purpose of the former paragraph 27A(1)(n) of Income Tax Assessment Act 1936 (ITAA 1936) (now superseded by paragraph 82-135(i) of ITAA 1997, the Administrative Appeals Tribunal (AAT) has cited Graham v. Robinson, in AAT Case 20/97; No 11 722 35 ATR 1114, 97 ATC 258 and held that personal injury does not extend beyond physical injury or mental illness.

In ATO ID 2001/767 (withdrawn in April 2010 on the basis that it is a simple restatement of the law) the Commissioner determined that the personal injury exclusion under the former section 27A(1)(n) of ITAA 1936 did not apply to part of a payment made in settlement of a claim for unfair dismissal as compensation for a stressful working environment. The Commissioner's view was that, citing Graham v. Robinson, the employee emotional stress manifested by vomiting, insomnia and agitation did not amount to mental injury. See also AAT Case [2005] AATA 583, where the AAT, citing the same authority, rejected that a payment was an exempt capital payment in respect of personal injury for, among other things, hurt, humiliation and distress. The AAT found that the expression personal injury does not extend beyond physical injury and mental illness to include emotional hurt.

Identifying personal injury components of the payment

Under the principle in McLaurin v. FCT (1961) 104 CLR 381, to exclude all or part of an amount under paragraph 82-135(i) of ITAA 1997, there must be an identifiable amount which has been calculated in respect of the personal injury that is capable of being dissected from the total settlement amount.

In AAT Case 11,722 (1997) 35 ATR 1114; 97 ATC 258, a payment to a taxpayer arising from the settlement of an unlawful dismissal action was held to be taxable as an ETP. The decision turned on the fact that the settlement agreement did not specify any part of the payment as relating to personal injury.

Essentially, the payment must be calculated by reference to the injury: FCT V Scully (2000) 201 CLR 148; 43 ATR 718. In that case, an accident victim who suffered total and permanent disablement was assessed on 5% of the invalidity payment on the basis that the payment was an ETP. The High Court, by a majority, held that the exclusion under the former paragraph 27A(1)(n) of ITAA 1936 did not operate and stated that while the payment was consideration, the way the calculation was made meant that it could not be said to be compensation for, or in respect of, the injury. The trust deed required a calculation based on 7 times the Member's Fund Average Salary, a calculation which did not necessarily reflect the monetary value of the taxpayer's injury. In their judgment the Court stated that:

In our opinion, the payment in this case cannot be characterised as consideration [mldr] in respect of, personal injury. The fact that the payment is not calculated by reference to the nature and extent of the injury or likely loss to the respondent and the fact that the other benefits are similar to that for total and permanent disablement point inevitably to the conclusion that the payment was consideration [mldr ] for, or in respect of the respondent's termination of employment and her rights under the trust deed and was not consideration [mldr ] for, or in respect of her injury.

Later in Dibb v FCT (2003) 53 ATR 290 - the Full Federal Court held that, in respect of a settlement payment made to a taxpayer, it was not possible to identify or dissect an amount to be excluded in respect of personal injury, as the deed of release did not specify the particular components to which the payment related. The Court went on to say that the former paragraph 27A(1)(n) only arises if there is consideration of a capital nature for, or in respect of, personal injury to the taxpayer. The Court also stated that paragraph 27A(1)(n) does not provide for consideration in respect of alleged personal injury.

Applying these principles to your case

The Commissioner is of the view that the payment of an amount to the employees as compensation under the DoR is not considered to be in respect of personal injury to a person based on the following factors:

• You stated in your application for a private ruling that in the employment contract, you 'mistakenly suggested' that the employees' period of service with the former employer would be counted for the purposes of calculating their LSL entitlements. An employment contract is legally binding between an employer and an employee. By offering to take into account the service period with the former employer in calculating the long service leave entitlements of the employees, you have essentially created and confer the right to receive such LSL under the terms of the contract to the employees. The right gives the employees a chose in action which can be taken to enforce the terms of the contract or for a claim to compensation that commensurate to that which is lost. Any commencement of legal proceedings by the employees to claim for compensation would be in pursuant of the right in respect to the entitlements which were created under the employment contracts.

• It is possible that some emotional stress experienced by the employees relating to the potential loss of the service period with the former employer in respect to their LSL entitlements. However, a claim for a compensation payment would not have arisen but for a right to an entitlement created under the employment contracts specifically recognising the service period with the former employer for the purpose of calculating LSL.

• In relation to personal injury, part (b) of item 1 under the heading 'Release' in the DoR linked the compensation to 'any and all emotional hurt, anxiety, depression and mental injury. As discussed above, particularly with respect to the Court decision in Graham v. Robinson, mental injury does not include emotional hurt.

• You provided additional information which included a report from an independent service provider. The report documents an Initial Needs Assessment which was carried out on an employee. The report stated that the purpose of the assessment is to determine an employee's risk of experiencing a mental injury as a direct result of the loss of his leave entitlements. In the summary of the finding from the assessment it was stated that an employee would be at risk of experiencing a mental injury as a direct result of the loss of his leave entitlements. The summary also stated that:

• The employee assessed reported currently experiencing emotional hurt and anxiety at the prospect of losing their leave entitlements. In addition, the employee advised that he has experienced ruminating thoughts regarding his concerns for the impact this decision would have upon their colleagues and their own future plans and financial security. Should such action occur it is my clinical opinion that the employee would find the situation significantly distressing; as such their current emotional response would be exacerbated. It is likely that this heightened emotional response would have a subsequent impact upon their physical health and their ability to engage in meaningful leisure and social activities. Furthermore, I believe these factors would also impact upon their sense of identity through their work role, future plans and overall routines.

• The above outlines the direct impact that a loss of their leave entitlements could have upon the employee. These are risk factors for the development of a mental injury and would compromise the employee's current mental health coping strategies. As such, under these circumstances, it would be reasonable to suggest that the employee would be at increased risk of experiencing a mental injury.

• During the assessment the employee stated that should changes be made to the leave entitlements they would pursue collective legal action. The employee further advised that such action would likely increase their experience of anxiety and distress and reduce their overall levels of comfort and happiness with the workplace.

The findings from the assessment presented the possibility of some form of mental injury that may develop from experiencing the loss of leave entitlements. There is no evidence based clinical conclusion that the employee had incurred or is suffering from a mental injury that is linked to the loss of leave entitlements. It is also worth noting that no other employees of the former employer were included in the assessment whose circumstances may be markedly different to that of the subject employee and may present a variety of different result. In paragraph 41 of the previous Draft Tax Ruling TR 1999/D1(Withdrawn) - Income tax and fringe benefits tax: meaning of 'personal injury', where a payment has been received in respect of personal injury, the evidence supporting both the fact that personal injury was suffered and the likely value of the damages awarded in respect of such personal injury must be presented to the Commissioner. Relevantly, as shown in the Dibb case the Court, in an ETP context, stated that the former paragraph 27A(1)(n) of ITAA 1936 does not provide for consideration in respect of alleged personal injury.

• The compensation payment under the DoR is a single gross amount and no portion of the amount is expressly attributed to or for personal injury. In these instances, the AAT had said that no part of the undissected compensation amount can represent a payment for or in respect of personal injury.

Applying the principles outlined in the Court decisions discussed above and the facts you have presented, the Commissioner is of the view that you have not shown that any part of the compensation payment would be in for or in respect of personal injury to a person.

Conclusion

As all the requirements established by the Court in respect to personal injury are not met for the purpose of paragraph 136(1)(m)(ii) of ITAA 1986, the compensation payment the employees will not qualify for the exclusion from the definition of a fringe benefit under the FBTAA. From your perspective as an employer, the compensation payment, if not excluded under a different paragraph in subsection 136(1), i.e. and ETP, will be taken to be a property fringe benefit subject to FBT.

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