Edited version of your written advice

Authorisation Number: 1051213436542

Date of advice: 3 May 2017

Ruling

Subject: Employment termination payments

Question

Is an amount awarded to you under the terms of a 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 periods:

Income year ending 30 June 20YY.

The scheme commences on:

1 July 20XX.

Relevant facts and circumstances

In the 20XX-YY income year, your employment was terminated on the basis that you were unable to attend work due to illness for an extended period without paid leave.

As a result of the termination, you made an application to the Fair Work Commission (the Application) alleging that your former employer (the Employer) dismissed your from your employment in breach of the general protection provision of the Fair Work Act 2009.

The Employer denied the allegations made in the Application.

Several months later, you and the Employer agreed to fully and finally settle the matters raised in the Application under the Terms of Settlement whereby:

a. the Employer agrees to pay you a specified amount, taxed as general damages;

b. you agree to release and forever discharge the Employer from all claims connected with your employment with the Employer, including but not limited to the termination of the employment; and

c. the Employer agrees to release and forever discharge you from all claims connected with your employment with the Employer, including but not limited to the termination of the employment.

2. Following the settlement, the Employer paid you the specified amount as agreed and treated it as an ETP for taxation purposes.

3. You are under preservation your preservation age.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-10

Income Tax Assessment Act 1997 subsection 82-10(1)

Income Tax Assessment Act 1997 subsection 82-10(2)

Income Tax Assessment Act 1997 subsection 82-10(3)

Income Tax Assessment Act 1997 subsection 82-10(4)

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

Income Tax Assessment Act 1997 section 82-145

Income Tax Assessment Act 1997 section 82-150

Income Tax Assessment Act 1997 section 82-155

Superannuation Industry (Supervision) Regulations 1994 subregulation 6.01(2)

Reasons for decision

Summary

The amount paid to you by the Employer under the Terms of Settlement is an ETP as defined under section 82-130 of the ITAA 1997 and is taxed accordingly.

Detailed reasoning

Employment termination payments

In accordance with subsection 82-130(1) of the ITAA 1997, a payment is an ETP 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. 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 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 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 received in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In your case, the specified amount was paid to you by the Employer in full and final settlement of a dispute which arose as a result of the termination of your employment with the Employer. While, as such, it may be said that the amount was received in consequence of the settlement and not in consequence of the termination, had it not been for the termination, there would have been no settlement and no payment.

Therefore, in this case, the specified amount was paid to you in consequence of the termination of your employment with the Employer because it is evident that but for the termination, the payment would not have been made.

Received no later than 12 months after the termination

Your employment was terminated in the 20XX-YY income year and the specified amount was received by you in the same income year.

As such, the payment was received within 12 months of termination of your employment.

Not a payment mentioned in section 82-135 of the ITAA 1997

Section 82-135 of the ITAA 1997 lists certain payments that are not ETPs.

The amount you received under the Terms of Settlement is not mentioned in this list.

Based on the above, all the conditions in subsection 82-130(1) of the ITAA 1997 have been met. Therefore, the specified amount is an ETP as defined in section 82-130 of the ITAA 1997 and is taxed accordingly.

Other Relevant Comments

Taxation of ETP

An ETP may be made up of two components: the 'tax-free component' and the 'taxable component'.

In accordance with subsection 82-10(1) of the ITAA 1997, the tax-free component of an ETP is not assessable income and is not exempt income. That is, it is tax-free.

Section 82-140 of the ITAA 1997 states that the tax-free component of an ETP consists of the invalidity segment of the payment and the pre-July 83 segment of the payment.

In accordance with section 82-145 of the ITAA 1997, the taxable component of an ETP is the amount of the payment less the tax free component.

The meaning of invalidity segment of an ETP is found in section 82-150 of the ITAA 1997; and the meaning of pre-July 83 segment is found in section 82-155 of the ITAA 1997. In this case, neither the conditions in section 82-150 nor the conditions in section 82-155 are met hence; the payment does not consist of a tax free component. That is, the payment consists entirely of the taxable component.

In accordance with subsection 82-10(2) of the ITAA 1997, the taxable component of an ETP is assessable income. However, subsection 82-10(3) of the ITAA 1997 provides that a tax offset applies to ensure that the rate of income tax on the amount mentioned in subsection 82-10 (4) of the ITAA 1997 does not exceed:

(a) if you are your *preservation age or older on the last day of the income year in which you receive the payment-15%; or

(b) otherwise-30%.

*To find definitions of asterisked terms, see the Dictionary, starting at section 995-1

1. Preservation age is defined in subregulation 6.01(2) of the Superannuation Industry (Supervision) Regulations 1994 and, for a person born after 30 June 1964, is 60 years.

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