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Edited version of your written advice
Authorisation Number: 1051192387842
Date of advice: 20 February 2017
Ruling
Subject: Employment termination payments
Question
Is the amount awarded to a person (the Taxpayer) under the Terms of Settlement an employment termination payment (ETP) in accordance with section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes
This ruling applies for the following period:
Income year ended 30 June 2016
The scheme commences on:
1 July 2015
Relevant facts and circumstances
The Taxpayer was employed by an entity (the Employer).
While employed by the Employer, the Taxpayer lodged a workers compensation claim.
Several months later, the Taxpayer was notified by the Employer that their employment will be terminated.
Immediately after, the Taxpayer lodged a General Protection Application Involving Dismissal (the Application) with the Fair Work Commission.
Subsequently, the Taxpayer’s employment with the Employer was terminated.
Later, the Taxpayer and the Employer agreed to fully and finally settle the Application proceedings under the Terms of Settlement.
The Terms of Settlement include the following terms:
● The Employer denies allegations of unfair dismissal.
● The Employer will pay a gross sum to the Taxpayer.
● The Taxpayer releases the Employer from any liability arising out of or connected with the Taxpayer’s employment with the Employer.
● The Employer releases the Taxpayer from all claims actions or proceedings arising out of the Taxpayer’s employment with the Employer.
The payment was received within 12 months of the termination.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 82-10
Income Tax Assessment Act 1997 subsection 82-10(3)
Income Tax Assessment Act 1997 section 82-130
Income Tax Assessment Act 1997 subsection 82-130(1)
Income Tax Assessment Act 1997 section 82-135
Income Tax Assessment Act 1997 section 82-140
Superannuation Industry (Supervision) Regulations 1994 subregulation 6.01(2)
Reasons for decision
Summary
The amount paid to the Taxpayer by the Employer under the Terms of Settlement is an ETP as defined in section 82-130 of the ITAA 1997.
Detailed reasoning
Employment termination payment
A payment is an ETP if it satisfies all the conditions set out in section 82-130 of the ITAA 1997. This section states:
(1) 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 that termination (but see subsection (4)); and
(c) it is not a payment mentioned in section 82-135.
Failure to satisfy any of the conditions under subsection 82-130(1) of the ITAA 1997 will result in the payment not being treated an ETP.
Paid as a consequence of the termination of your employment
The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this phrase, the Commissioner’s view on the meaning and application of the 'in consequence of' test is set out in 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).
While TR 2003/13 considered the meaning of the phrase ‘in consequence of’ in the context of the eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term ‘in consequence of’ in the same manner.
In paragraphs 5 and 6 of TR 2003/13 the Commissioner states:
5. … 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. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.
In this case, the Employer terminated the Taxpayer’s employment. As a result of the termination, the Taxpayer commenced the Application proceedings against the Employer. The proceedings were eventually settled and, as a result of the settlement, the Taxpayer was paid a settlement sum.
While the settlement of the Application proceedings is a direct cause of the payment, the proceedings were commenced by the Taxpayer as a result of the termination of their employment. As such, there was a sequence of events following the termination which had a relationship and connection which ultimately lead to the payment. That is, but for the termination, there would have been no Application, no settlement and no payment.
As there is undeniably a causal connection between the termination and the payment, it is considered that the settlement amount was received by the Taxpayer in consequence of the termination of their employment with the Employer.
Payment is received no later than 12 months after termination
The settlement payment was received by the Taxpayer within 12 months of the termination, as required by paragraph 82-130(1)(b) of the ITAA 1997.
Payment is not a payment mentioned under section 82-135 of the ITAA 1997
Section 82-135 of the ITAA 1997 lists certain payments that are not ETPs.
The amount awarded to the Taxpayer is not included in the list, therefore this condition is satisfied.
As all the conditions of subsection 82-130(1) of the ITAA 1997 are satisfied, the amount paid to the Taxpayer by the Employer is an ETP as defined in section 82-130 of the ITAA 1997.
ATO view documents
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)
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