Edited version of your written advice

Authorisation Number: 1051253043892

Date of advice: 21 September 2017

Ruling

Subject: Compensation payment

Question 1

Is the settlement sum received an employment termination payment?

Answer

No

Question 2

Is the capital gain you made from the settlement sum disregarded?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You were employed with an entity (the Employer).

You were notified by the Employer that your employment had been terminated due to a company restructure.

You have stated that the termination payment was not a genuine redundancy payment as the Employer is a small business of less than 15 employees and you were not an employee for the required period in order to be entitled to a redundancy payment.

You made an application to the Fair Work Commission seeking compensation for a breach of the general protections provisions of the Fair Work Act 2009 (the Claim).

The matter was settled and both parties signed the Terms of Settlement (the Settlement)

The Settlement states:

The Applicant has made an application to the Fair Work Commission alleging that the Respondent dismissed them from their employment with the Respondent in breach of the general protections provisions of the Fair Work Act 2009.

……

3.1 The Respondent will pay to the Applicant the amount as a lump sum within 7 days of the Applicant and the Respondent signing these terms of the settlement.

Your Employer issued a PAYG payment summary which listed the settlement sum as an employment termination payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5,

Income Tax Assessment Act 1997 subsection 82-10,

Income Tax Assessment Act 1997 section 82-130,

Income Tax Assessment Act 1997 section 82-135,

Income Tax Assessment Act 1997 section 102-5 and

Income Tax Assessment Act 1997 section 118-37.

Reasons for decision

Question 1

Summary

The payment, being settlement of an application to the Fair Work Commission, is not an employment termination payment as it was not paid as a result of your termination.

Detailed reasoning

A payment made to an employee is an employment termination payment (ETP) if it satisfies all the requirements of section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997) and is not specifically excluded under section 82-135.

In accordance with subsection 82-130(1) of the ITAA 1997, 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 persons 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.

Payment ‘in consequence’ of termination

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 employment: meaning of the phrase ‘in consequence of’ (TR 2003/13).

While TR 2003/13 contains references to repealed provisions, some of which 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 paragraph 5 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.

In this instance, while the payment was made after your employment had been terminated it was not the result of the termination. Rather, the nature of the payment was compensatory; it was made in consequence of a Claim and as a result of the conduct of your employer during your employment. It cannot be said that but for the termination, the payment would not have been made as the Claim could have been filed during your employment.

Consequently, it is considered that the amount $X was not received in consequence of the termination of your employment and is therefore not an ETP.

Question 2

Summary

The settlement sum you received related to your Fair Work Commission application against your former employer. The settlement payment followed as a result of the incidents suffered by you and was not in relation to the cessation of your employment. Therefore the amount you received was capital in nature and represents the disposal of your right to seek compensation. The capital gain is disregarded under paragraph 118-37(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Receipt of a lump sum payment may give rise to a capital gain. The net capital gain you make is then included in your assessable income under section 102-5 of the ITAA 1997 unless an exemption applies.

Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation.

As the amount you received is not in respect of any underlying asset, the whole of the settlement amount for general damages is treated as capital proceeds from a CGT event (CGT event C2) happening to your right to seek compensation.

However, paragraph 118-37(1)(a) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any wrong or injury you suffer in your occupation.

In your case the compensation payment received was in result of the Fair Work Commission application which made allegations against your employer. The settlement payment was compensation for a series of events that occurred during your employment. Therefore, the capital gain made from the CGT event happening to your right to seek compensation is disregarded under paragraph 118-37(1)(a) of the ITAA 1997.

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