Edited version of your written advice

Authorisation Number: 1051475200899

Date of advice: 14 February 2019

Ruling

Subject: Employment termination payments

Question

Should the taxable component of the employment termination payment received by the Taxpayer be excluded from the whole-of-income cap under paragraph 82-10(6)(d) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2018

The scheme commences on:

1 July 2018

Relevant facts and circumstances

1. The Taxpayer commenced employment with the Employer in accordance with the Individual Remuneration Agreement on DDMMYY.

2. In or about June 2017 the Employer levelled allegations of misconduct, including bullying, at the Taxpayer. The Taxpayer denied the allegations.

3. Following an investigation by the Employer into the allegations, the Employer director the Taxpayer cease attendance at their workplace and requested the resignation of the Taxpayer.

4. The Taxpayer asserts the conduct of the Employer amounted to constructive dismissal of the Taxpayer.

5. On DDMMYY the Employer circulated an email to clients notifying them that another employee had taken on the Taxpayer’s role, and that there was a ‘change of management’.

6. On DDMMYY the Taxpayer and the Employer entered into Deed of Settlement and Release (the Deed) to settle the dispute on the basis that the Taxpayer be paid a settlement sum. As per clause 2.4 of the Deed, the employment was terminated on DDMMYY.

7. Amongst other clauses, the Deed states, in part, at clause XX:

Settlement Sum

a. …The Employer will pay to the Employee $xxx,xxx (gross) less taxation …comprising the following:

i. $xxx,xxx.xx being an amount equal to six month’s salary in lieu of notice.

ii. $xx,xxx.xx being payment equal to 487.50 hours of long service leave.

iii. $xx,xxx.xx being payment of any accrued annual leave entitlements.

iv. $x,xxx.xx being an amount equal to the value of superannuation payable on the travel inconvenience allowance.

b. The Employee agrees that $x,xxx.xx (gross), which represents purchased leave owed by the Employee to the Employer at the Termination Date, will be deducted from the Settlement Sum and will not be paid to the Employee.

c. The Settlement Sum will be paid within fourteen days of the Termination Date.

d. The Employee acknowledges payment under this deed is made in full satisfaction of all obligations of the Employer towards the Employee in relation to the Employment (including all payments due under the Employment Agreement) and is made without admission of liability by the Employer.

8. Amongst other clauses, the Deed states, in part, at clause XX:

Taxation and Superannuation

a. …tax in the amount of $xxx,xxx will be withheld from the Settlement sum in accordance with the view of the Employer as to the Australian Tax Office governing eligible termination payments.

b. The Employer makes no representations or warranties in relation to the Employee’s tax liability.

c. If the Employer withholds tax form the gross Settlement Sum and the Australian Taxation Office determines, subject to objection and appeal by the Employee, that a greater amount of tax should have been withheld, the Employee indemnifies and keeps indemnified the Employer in respect of the difference.

d. the Employer will make a superannuation contribution of $xx,xxx.xx on the Settlement Sum as considered by the Employer to be required by law.

9. The Taxpayer did not make an application to the Fair Work Commission for unfair dismissal based on the following factors:

a. Unfair dismissal proceedings would incur substantial legal fees

b. It could take up to twelve months to obtain a judgement

c. There was no guarantee as to the successful outcome of litigation before the Fair Work Commission

d. Based on legal advice the Taxpayer concluded that if he succeeded, he could not recover amounts with respect to long service leave.

10. The Taxpayer contends there was conduct by the Employer in pressuring the Taxpayer to resign, and that they were not given any opportunity to put forward reasons why the suspension should not occur.

11. The Taxpayer contends that the compensation component was paid in connection with a genuine dispute and was compensation for unfair dismissal and exceeded the amount that could, at the time of the termination of their employment, reasonably be expected to be received by them in consequence of the voluntary termination of their employment.

12. The Taxpayer contends that the Employment Agreement made no reference to them having a right to receive six month’s salary in the event that they voluntarily terminated the agreement.

13. The Taxpayer contends the compensation component of $xx,xxx.xx is within the ETP cap amount and it should have been concessionally taxed as an excluded payment in accordance with paragraph 82-10(6)(d) of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-10

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

Income Tax Assessment Act 1997 Paragraph 82-10(4)(c)

Income Tax Assessment Act 1997 Subsection 82-10(5)

Income Tax Assessment Act 1997 Subsection 82-10(6)

Income Tax Assessment Act 1997 Paragraph 82-10(6)(d)

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(1)(a)(i)

Income Tax Assessment Act 1997 Subparagraph 82-130(1)(b)

Income Tax Assessment Act 1997 Subparagraph 82-130(1)(c)

Income Tax Assessment Act 1997 Section 82-135

Reasons for decision

Whole-of-income cap

14. ETPs may be subject to a whole-of-income cap of $180,000 which is not indexed. Any part of an employment termination payment you receive that exceeds the whole-of-income cap will be taxed at the highest marginal tax rate (plus Medicare levy).

Taxation of an employment termination payment

15. Subsection 82-10(4) of the ITAA 1997 states that:

The following is so much of the taxable component of the payment as does not exceed the smallest of the following:

(a) the ETP cap amount reduced (but not below zero) by:

(a) (i) if the payment is a kind referred to in subsection (6) (an excluded payment) – the amount worked out under this subsection for each life benefit termination payment you have received earlier in the income year to the extent that it is excluded payment; or

(b) (ii) if the payment is not an excluded payment – the amount worked out under this subsection for each life benefit termination payment you have received earlier in the income year;

(b) the ETP cap amount reduced (but not below zero) by:

(c) (i) if the payment is an excluded payment – the amount worked out under this subsection for each life benefit termination payment you have received earlier in consequence of the same employment termination (whether in the income year or an earlier income year) to the extent that it is an excluded payment; or

(d) (ii) if the payment is not an excluded payment – the amount worked out under this subsection for each life benefit termination payment you have received earlier in consequence of the same employment termination (whether in the income year or an earlier income year);

(c) if the payment is not an excluded payment – $180,000, reduced (but not below zero) by your taxable income for the income year in which the payment is made.

16. Further, subsection 82-10(5) of the ITAA 1997 provides that for the purposes of paragraph 82-10(4)(c), a person’s taxable income for the income year will disregard:

(a) the taxable component of the payment; and

(b) the taxable component of each life benefit termination payment you receive later in the income year.

17. However, subsection 82-10(6) of the ITAA 1997 provides that paragraph 82-10(4)(c) does not apply in relation to life benefit termination payments:

(a) that are genuine redundancy payments, or that would be genuine redundancy payments but for paragraph 83-175(2)(a); or

(b) that are *early retirement scheme payments; or

(c) that include *invalidity segments, or what would be invalidity segments included in such payments but for paragraph 82-150(1)(c); or

(d) that:

(i) are paid in connection with a genuine dispute; and

(ii) are principally compensation for personal injury, unfair dismissal, harassment, discrimination or a matter prescribed by the regulations; and

(iii) exceed the amount that could, at the time of the termination of your employment, reasonably be expected to be received by you in consequence of the voluntary termination of your employment.

18. As such the whole of income cap operates to remove the tax offset in respect of employment termination payments for individuals whose taxable income exceed $180,000. It does this by:

Step 1: deducting a person’s taxable income from the year, other than the taxable component of any employment termination payment received, from $180,000;

Step 2: calculating the person’s ETP cap amount; and

Step 3: comparing the result in Step 1 with the result in Step 2. The offset allowable is calculated on the lesser of these two amounts, but is not less than zero.

19. Consequently, any amount of a taxable component of an employment termination payment that takes a person’s taxable income over $180,000 will be taxed at marginal rates.

Payments excluded from the whole-of-income cap

20. To determine if an employment termination payment is excluded from the whole-of-income cap, subsection 82-10(6) of the ITAA 1997 must be satisfied. Failure to satisfy at least one of the conditions listed under this subsection will prevent the payment from being excluded under the whole-of-income cap.

Paid in connection with a genuine dispute

1. The Taxpayer contends that the conduct of the Employer in directing them to cease attendance at the workplace amounted to constructive dismissal from their employment.

2. The Taxpayer claims they had been unlawfully constructively dismissed at the time that they were stood down from duties by the Employer and the payment of six months’ salary in lieu of notice, was in substance and fact a payment of compensation for abandonment of the Taxpayer’s claim for damages for constructive dismissal.

3. While it is clear the Taxpayer was displeased with the Employer’s decision to terminate their employment, they have not provided any evidence of a ‘genuine dispute’ regarding the process and outcome.

4. Obtaining legal advice in relation to the termination of employment does not in itself show that there was a dispute. It would be common for someone in a situation similar to the Taxpayer to seek legal advice to ensure the terms of their separation were reasonable.

5. By entering into the Deed, the Taxpayer has in fact agreed to the terms relating to the termination of their employment.

6. As the Taxpayer has not provided evidence of a genuine dispute, this condition is not satisfied.

Principally compensation for unfair dismissal

7. The Taxpayer has contended that they have been constructively dismissed as it was not due to any of the clauses outlined in the Employment Agreement under summary termination by the Employer.

8. In spite of this, the Employment Agreement did not imply a finite period of employment and did not contain any clause pertaining to regular termination of employment by the Employer.

9. It is generally accepted under common law where a contract of employment has no agreed duration and makes no provision for termination, it is implied that the contract may be terminated upon reasonable notice being provided.

10. In support of this view, Byrne v Australian Airlines (1995) 185 CLR 410 at 450 summarised that:

…at common law a contract of employment for no set term is to be regarded as containing an implied term that the employer give reasonable notice of termination except in circumstances justifying summary dismissal.

11. As per the Deed, a termination date of DDMMYY was agreed, and a payment was made by the Employer reflecting six months’ total remuneration.

12. The Taxpayer has not demonstrated that the termination of employment was unlawful or unfair.

13. Furthermore, it is clear from the terms of the Deed that the payment is not principally compensation for unfair dismissal.

14. Accordingly, this condition has not been satisfied.

Exceeds amount on voluntary termination

15. Under the terms of the Taxpayer’s employment agreement, it is unlikely the Taxpayer would have received the payment if they voluntarily terminated their employment. Therefore, this condition is satisfied.

Conclusion

16. As the payment does not meet all of conditions under subsection 82-10(6) of the ITAA 1997, it cannot be excluded from the whole-of-income cap. Therefore, the whole of income cap will apply to the employment termination payment.

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