| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1051371353471
Date of advice: 9 May 2018
Ruling
Subject: Compensation
Question
Is the payment received by you under a Deed of Release an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes
This ruling applies for the following period:
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
1. You commenced employment with ‘the Employer’ as a permanent full-time employee.
2. You were informed by the Employer they had serious concerns with your fitness for work and required you to attend a medical assessment by an independent medical assessor
3. The Employer issued you a letter advising of the termination of your employment. The letter confirms your employment was terminated immediately.
4. You lodged a disability discrimination complaint against the Employer with the Australian Human Rights Commission (AHRC).
5. You attended a conciliation conference when an in-principal agreement was reached to resolve the complaint. Without any admission of liability, the Employer specifically agreed to:
a. pay you an amount to be classified as general damages
b. the payment was subject to both parties entering into a Deed of Release.
6. The parties executed a Deed of Release confirming the following:
a. you were employed by the Employer for a period of time
b. both parties agreed to enter into the Deed of Release voluntarily
c. the Employer, within 21 days of the receipt of the signed deed, will pay you an amount characterised as general damages
d. tax may be withheld by the Employer from the payment
e. you acknowledge and agree that any benefits provided by the Employer under the deed are provided in full and final satisfaction of, and discharge all of, the obligations of the Employer.
7. An amount was made directly into your bank account by the Employer.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 subsection 6-5(2)
Income Tax Assessment Act 1997 section 6-10
Income Tax Assessment Act 1997 section 15-2
Income Tax Assessment Act 1997 section 80-50
Income Tax Assessment Act 1997 section 82-130
Income Tax Assessment Act 1997 subsection 82-130(1)
Income Tax Assessment Act 1997 subparagraph 82-130(a)(i)
Income Tax Assessment Act 1997 section 82-135
Income Tax Assessment Act 1997 section 995-1
Reasons for Decision
The payment made to you under the Deed of Release is an employment termination payment as all the conditions have been satisfied and it is not tax exempt.
Detailed reasoning
A payment is an employment termination payment if it is:
● received by you due to your employment being terminated and
● received no later than 12 months after that termination (ie section 995-1(1) and subsection 82-130 of the ITAA 1997).
The Commissioners view on compensation payments in respect of unlawful acts of discrimination is found in Taxation Ruling IT 2424.
Paragraph 8 of IT 2424 states:
… a payment to compensate for personal injury, injury to feelings, humiliation, embarrassment, depression, anxiety, etc. is not liable to income tax. It is a payment of a capital nature. Nor is the payment liable to tax under the capital gains tax provisions by reason of the exemption provided in sub-section 160ZB(1) for compensation or damages paid for wrong or injury suffered by a taxpayer to his or her person or in his or her profession or vocation.
If you receive a settlement in respect of unlawful dismissal that is a compensation payment, this will qualify as an eligible termination payment (paragraph 24 of IT 2424).
In this case, you have claimed that the payment should not be taxed as it is characterised as general damages.
However, clause 1 (a) and (d) of the deed says:
a. tax may be withheld by the Employer from the payment
b. you acknowledge and agree that any benefits provided by the Employer under the deed are provided in full and final satisfaction of, and discharge all of, the obligations of the Employer.
This clause of the deed provides that the payment was made to you as a settlement payment under the Deed of Release. However, it also clearly states that the Employer will make a payment to you ‘without admissions’.
Consequently, no finding or admission has been made in respect of personal injury, injury to feelings, humiliation, embarrassment, depression and anxiety, and therefore, the payment is not compensation for any of those claims.
However, as discussed above, because clause 2 of the Deed of Release provides that in return for the payment, you release the employer from any claims you may have arising out of your employment or the cessation of that employment, the payment will be an employment termination payment.
Copyright notice
© Australian Taxation Office for the Commonwealth of Australia
You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
