Edited version of your written advice

Authorisation Number: 1051195675163

Date of Advice: 27 February 2017

Ruling

Subject: Employment termination payments

Question 1

Will the proposed payment to be made to you be assessable as an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the proposed payment be subject to Capital Gains Tax?

Answer

No

This ruling applies for the following periods:

Income year ending 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

You commenced employment with the Employer.

You were absent from work due to an illness.

The Employer notified you of misconduct allegations against them (Misconduct Allegations).

You filed a claim for workers compensation payments arising from alleged bullying and workplace harassment (Workers Compensation Claim).

The Workers Compensation Claim was rejected.

You filed an Application for the Tribunal to review the workers compensation decision.

The Employer advised you that it considered that the allegations had been substantiated, and terminated your employment on the basis of serious and wilful misconduct.

You commenced unfair dismissal proceedings in the Fair Work Commission in respect of the Termination (Unfair Dismissal Claim).

Without any admission of any liability by either party, you and the Employer have agreed to resolve all matters between them and settle any current or potential claims by you on the terms set out in a Deed of Release (the Deed).

The terms of the Deed include the following:

1. It is a condition precedent to the commencement of the operation of the Deed that you execute all documents necessary to give effect to the settlement of the Workers Compensation Claim and the discontinuance of the Unfair Dismissal Claim (clause 2.1). :

2. The Employer shall pay to you, within ten working days of receiving a duly executed original counterpart of the Deed, the Settlement Payment (clause 3.1).

3. The Settlement Payment is made in exchange for your agreement to all of the obligations imposed upon you in the Deed. You acknowledge that any failure to comply with the obligations outlined in the Deed will enable the Employer to recover the Settlement Payment paid to you (clause 3.2).

4. You agree that the payment of the amounts and the provision of the benefits under the Deed are in full and final satisfaction and discharge of the obligations of the Employer to you in respect of the Employment, the terms and conditions of your contract of employment with the Employer, any applicable industrial instrument, the Fair Work Act 2009 and long service leave legislation (clause 10).

5. The Settlement Payment means a gross amount of $xxxx (subject to applicable tax) being for 'Hurt, Humiliation and Distress' suffered by you (schedule 1).

The Settlement Payment will be made in the income year ending 30 June 2017.

Relevant legislative provisions

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 paragraph 82-135(i)

Reasons for decision

Employment termination payments

Subsection 82-130(1) of the ITAA 1997 states that:

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.

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. Taking into account the courts decisions on the meaning of the phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are 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 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect 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:

… 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.

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.

At paragraph 31 of TR 2003/13 the Commissioner considers payments made to settle wrongful dismissal and states:

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.

In this case, the Settlement Payment is to be paid to you to settle all the claims, including a claim for unfair dismissal, brought by them against the Employer. While the settlement of the legal proceedings (the Workers Compensation Claim and the Unfair Dismissal Claim) is a direct cause of the payment, the proceedings in respect of the Unfair Dismissal Claim were commenced by you as a result of the termination of their employment. That is, there was a sequence of events following the termination which had a relationship and connection which ultimately leads to the Settlement Payment.

While it may be said that the Workers Compensation Claim existed prior to the termination, and could have been pursued by you regardless of the termination, there is undeniably a causal connection between the termination and the payment. As stated by the Commissioner in paragraph 6 of TR 2003/13, the termination need not be the dominant cause of the payment.

Therefore, it is considered that the Settlement Payment would be received by you in consequence of the termination of their employment with the Employer.

The payment is received no later than 12 months after termination

In your case, the Deed stipulates that the Employer must make the payment within ten working days of receiving a duly executed Deed. The Deed is expected to be executed before the end of the 2016-17 income years (30 June 2017), which means the payment will be made within 12 months of the termination.

Therefore, the Settlement Payment would satisfy the requirements of paragraph 82-130(1)(b) of the ITAA 1997.

Exclusions under section 82-135 of the ITAA 1997

Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments and includes:

(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);

The phrase 'personal injury' is not defined in the ITAA 1997 therefore, consistent with basic principles of statutory interpretation, its meaning must be determined according to the ordinary meaning of the words, having regard to the context in which they appear.

In Commissioner of Taxation (Cth) v. Scully (2000) 201 CLR 148; [2000] HCA 6; (2000) 2000 ATC 4111; (2000) 43 ATR 718 (Scully) the High Court , said that, to come within this exception, the payment must be shown to be 'calculated by reference to the nature and extent of the injury or likely loss' to the taxpayer.

In Re Luke and Federal Commissioner of Taxation [2011] AATA 801; (2011) 2011 ATC 10-216; the Administrative Appeals Tribunal (AAT) accepted that the taxpayer had been adversely affected by what they perceived to be unreasonable harassment and discrimination in their employment, but said that 'personal injury' does not extend 'beyond physical injury and mental illness to include emotional hurt'. The AAT added that:

Evidence is required that the payment had some form of identifiable and unambiguous connection with a personal injury, for which compensation was necessary as a reflection of the fact that the applicant's capacity to derive income from personal exertion had been impaired.

In view of the above, it can be said that only an injury that involves physical injury and/or mental injury that is clearly discernible to a qualified medical practitioner falls within the meaning of the term 'personal injury' as used in the paragraph 82-135(i) of the ITAA 1997.

Therefore, for a payment to be excluded under paragraph 82-135(i) of the ITAA 1997, the payment must be for personal injury or mental illness and must be calculated by reference to the nature and extent of the injury or likely loss to the taxpayer.

In this case, you is to be paid the Settlement Payment to settle all claims (including the Workers Compensation Claim) which you has or may have against the Employer in respect of, or arising out of, the employment and the termination of their employment with the Employer. It is a single undissected lump sum payment which is to be made by the Employer without admission of liability, and so, there is no evidence to indicate whether, and if so what portion, of the payment had been calculated with regard to your likely loss of income producing capacity.

In addition, the Settlement Payment is also defined in the Deed as a payment for 'Hurt, Humiliation and Distress' suffered by you, and as such, is not considered to be a payment for personal injury for the purposes of paragraph 82-135(i) of the ITAA 1997.

Therefore, the Settlement Payment is not a payment for, or in respect of, personal injury which would be is excluded from being an employment termination payment under paragraph 82-135(i) of the ITAA 1997.

Consequently, the Settlement Payment would be an employment termination payment as defined in section 82-130 of the ITAA 1997 and therefore regarded as assessable income.

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