Edited version of private advice

Authorisation Number: 1051505392371

Date of advice: 13 June 2019

Ruling

Subject: Employment termination payment

Question

Is the lump sum paid to you by your former employer in settlement of litigation proceedings 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 ending 30 June 201C

The scheme commences on:

201A

Relevant facts and circumstances

In 201A you commenced employment with the Employer.

You suffered health issues and state that this was a direct result of stress from your employment with the Employer.

In 201B as part of your performance review you raised concerns regarding to your health as a result of stress from mismanagement and bullying. The matter was escalated to senior management and Human Resources.

In 201B the Employer made a fitness for work request as the Employer did not believe you were fit for work. As a result in 201B you were stood down from your employment.

In 201B you raised a bullying complaint. The employer commenced a workplace assessment regarding the complaint.

In 201B you began legal proceeding through Fair Work Commission.

The Employer provided you with a Settlement Agreement which you signed in 201C.

In 201C the Employer issued an employment termination payment PAYG payment summary to you.

In 201C you applied for a private ruling in relation to the tax treatment of the settlement sum received by you in settlement of litigation proceedings.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-135

Reasons for decision

Summary

The payment you received is not exempt from tax, as a capital payment for, or in respect of, a personal injury, in accordance with paragraph 82-135(i) of the ITAA 1997.

The payment you received is an employment termination payment (ETP) in accordance with 82-130(1) of the ITAA 1997 and is taxed accordingly.

Detailed reasoning

Employment termination payment

A payment is an employment termination payment if it satisfies all the requirements in section 82-130 of the ITAA 1997 and is not specifically excluded under section 82-135 of the ITAA 1997.

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

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 the termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

·        payment for unused annual leave or unused long service leave;

·        the tax-free part of a genuine redundancy payment or an early retirement scheme payment.

·        capital payments for personal injury

Paid 'in consequence' of the termination of 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 made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

Paragraphs 31 and 32 of TR 2003/13 deal with settlement of litigation proceedings as follows:

31. 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.

32. The Federal Court in Dibb v. FC of T ⁵ adopted the approach of Goldberg J in Le Grand. At issue was whether a payment received by the taxpayer under a deed of release, following the settlement of Federal Court proceedings against his former employer, was an ETP. In deciding the payment was an ETP, Heery J held that the length of time between the termination of employment, the commencement of court proceedings and payment following settlement did not sever the causal connection between the termination and the payment. It was sufficient that the subject matter of the litigation was the termination. Heery J found at 296 that:

'The various causes of action whether breach of contract, conspiracy, breach of fiduciary duty or contravention of the Trade Practices Act were, as Goldberg J would say (Le Grand at [36]), 'interwoven and intertwined' with the termination. The payment was a consequence of the settlement, which was a consequence of the Federal Court proceeding, which in turn was a consequence of the termination.'

·        the Employer stood you down as you were deemed to be unfit for work.

·        you filed a claim with the Fair Work Commissioner from the Employer. The claim alleged that the Employer had taken adverse action and discriminated against you causing you pain and suffering.

The general protections claim with the Fair Work Commissioner commenced before your resignation.

The subject of your general protections claim (the Claim), deals with the following:

·        you have suffered, due to stress and bullying actions of the Employer

·        you are at dispute with the Employer regarding the Achievement and Development process and results

·        you are at dispute with the Employer regarding FFW Request and the events subsequent to the Request including standing you down from employment and revoking your access to the site.

you and the Employer negotiated a settlement and agreed that the Employer would pay you an amount

You signed Settlement Agreement on. Page 2, recital J of the Settlement Agreement states:

'Without any admission of liability, the parties have agreed to resolve all matters relating to the Employment, Disputes and Applications on the terms set out in this document.'

the Employer issued an employment termination payment PAYG payment summary to you, showing a taxable component tax withheld amount. To use the language of Le Grand, the relevant question to ask is whether the payment would have been made 'but for' the termination of your employment. In this case, the Deed was entered into for the settlement of the Proceedings under which you claimed damages for losses which primarily arose from termination. In other words, but for the termination of your employment, you would not been entitled to claim for loss of base remuneration, loss of additional income through sales commission and loss of future employment income. As such, the sum paid to you in settlement of litigation proceedings followed as an effect or result of the termination.

The payment of the settlement sum under the Deed was therefore made 'in consequence of' the termination of your employment. 'In consequence of the termination' requires that termination be a cause, but not necessarily a dominant cause of a payment. There is a causal connection between the termination and the payment of the settlement sum. The termination, the legal proceedings and the payment are intertwined.

Payment must be received no later than 12 months after termination

As it has been determined that the settlement sum, was received in consequence of your termination of employment, paragraph 82-130(1)(b) of the ITAA 1997 of the definition of employment termination payment also requires that the amount is paid to you within 12 months of your termination.

As the settlement sum was paid within 12 months of your termination, paragraph 82-130(1)(b) of the ITAA 1997 is satisfied.

Capital payment for, or in respect of, personal injury

Under paragraph 82-135(i) of the ITAA 1997 (paragraph (i) exclusion), for a payment to be excluded from the definition of an employment termination payment there must be:

Ÿ    a capital payment;

Ÿ    for, or in respect of, personal injury; and

Ÿ    the payment must be reasonable, having regard to the nature of the personal injury and its likely effect on your capacity to derive income from personal exertion

It is proposed to look at each of these requirements in turn.

Capital payment

The paragraph (i) exclusion requires the receipt of a payment that compensates or reimburses the taxpayer for or in respect of the particular injury.

The payment must be a capital payment, not income. Payments that would be income under ordinary concepts, such as salary and wages or periodic workers' compensation payments are not capital payments

In this case a lump sum payment was made to you. The payment, in your hands, is not one that is received in a regular, recurrent or periodic manner through deriving your income. The payment is a one-off payment for the reasons set out under the provision of the settlement agreement, the amount is considered to be a 'capital' payment.

For, or in respect of, personal injury

The AAT has considered the meaning of 'personal injury', in respect of termination payments. The decisions in bothCase 11,722and McMahon v FC of T [1999] AATA 5; (1999) 41 ATR 1056; (1999) 99 ATC 2025 (McMahon's Case), cited Graham v. Robinson [1992] 1 VR 279 (Graham v. Robinson), and held that personal injury does not extend beyond physical injury or mental illness.

Flowing from these decisions, 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 (i) exclusion.

Based on the documents you have provided for this case, your injuries have satisfied the meaning of a 'personal injury'.

Furthermore, consideration is made as to whether the payment was made 'for, or in respect of', personal injury.

In Scully v.Commissioner of Taxation(1998)84FCR 41; (1998)39ATR213; (1998)164ALR 281; (1998)98ATC4671, in relation to former section 27A(1)(n) of the Income Tax Assessment Act 1936 (ITAA 1936), the Federal Court considered the meaning of 'in respect of personal injury' and states that:

The words ''in respect of personal injury'' are to be given a meaning which extends beyond what would otherwise be included by use of the expression

''for personal injury''. While both expressions ''for'' and ''in respect of'' require a connection between the consideration and the injury, the expression ''for'' denotes a more immediate connection. For example, an order of a court or tribunal awarding general damages for a broken leg could be said to be an award made for personal injury in the sense of being compensation for the disability arising from that injury.

...

In order to resolve the present question, it is necessary to consider the bases on which the payment has been made. Under cl 2.4.1 of the Deed, set out above, the obligation on the Trustees to pay the benefit arises in the event of termination of employment on the grounds of total and permanent disablement. There are two elements in this description of the event which give rise to an entitlement. The first is termination of employment. The second is that termination must be on the ground of total and permanent disablement. As seen earlier, the term ''disablement'' is defined as disablement caused through a number of matters; the relevant one for present purposes being ''bodily injury''. This latter term equates with the expression ''personal injury''. Clause 3.5.1 of the Deed is concerned with such a payment made in the event of total and permanent disablement whilst in the employ of the employer. If the member becomes totally and permanently disabled during the employment then the entitlement arises.

The member's entitlement, under the Deed, in the present case, arises not simply upon termination of employment alone but upon termination on the ground of total and permanent disablement. This is a composite requirement. It is an essential requirement of any entitlement that it arise because of the total and permanent disablement, which results from bodily or physical injury. Therefore, in a practical and significant respect, the payment is made as a consequence of the underlying basis of personal injury. A classification of the personal injury as being simply a condition precedent

In other words, there were two conditions that had to be satisfied in order for you to be eligible for the payment:

a.     There was no suitable employment for you within the Service and hence you are terminated from your employment; and

b.     You had suffered a partial and permanent disability while on duty.

From this, it can be concluded that you would not have received the payment, had you not met the criteria of 'partial and permanent disability' which resulted from suffering 'personal injury'.

Accordingly, the payment is considered to have been made 'in respect of' personal injury.

'Reasonable' having regard to the nature of the personal injury

The final requirement under the paragraph (i) exclusion is that the consideration is excluded from being an employment termination payment to the extent that it is reasonable, having regard to the nature of the injury and its likely effect on the capacity of you to derive income from personal exertion.

In Commissioner of Taxation v. Scully [2000] HCA 6; 2000 ATC 4111; (2000) 43 ATR 718; (2000) 169 ALR 459; (2000) 74 ALJR 504; (2000) 201 CLR 148, the High Court held that compensation must be calculated by reference to the nature and extent of the injury or likely loss to the taxpayer.

In other words, the amount of the capital payment must have been determined with the nature and effect of the personal injury in mind.

Further, the full Federal Court case Dibb v. Commissioner of Taxation (2004) 207 ALR 151; 2004 ATC 4555; (2004) 55 ATR 786; (2004) 136 FCR 388; [2004] ALMD 5780; [2004] FCAFC 126 (Dibb's Case), while considering whether any part of a settlement payment was in respect of personal injury, Justices Spender, Dowsett and Allsop accepted the argument of Justice Heerey in Dibb v. Federal Commissioner of Taxation 2003 ATC 4613; (2003) 53 ATR 290; [2004] ALMD 5781; [2003] FCA 673 (Dibb), saying:

45. As to this matter, the reasons of the primary Judge were as follows [ATC at 4618]:

"32. Before the Commissioner on the objection hearing were two medical certificates dated respectively 21 July 1997 and 19 December 2002 from Dr Jim Ryan of Wishart, Queensland. In the first of these reports Dr Ryan stated:

'This is to certify that I have been treating Mr Dibb for Anxiety/Depression since September 1996. This I believe has come about I believe as a result of losing his job. Currently he takes anti-depressant medication with a gradually increasing dosage. He received a medical certificate excusing him from Jury Duty partly because of his serious condition.'

33. In the second certificate Dr Ryan stated:

'This is to certify that I am treating this (patient/man) for dermatitis, hypertension, gastrointestinal disorder and depression.'

34. Counsel for the Commissioner accepted that, in an appropriate case, a single payment made in consequence of the termination of employment of a taxpayer may be apportioned amongst several heads to which it relates. One of those heads could be consideration in respect to personal injury within the meaning of s 27A(1)(n). To that extent the payment may be treated as not being an ETP.

35. 'Personal injury' encompasses injury or disease of a physical or psychological nature. However it would not extend to anguish, distress or embarrassment of the kind traditionally taken into account in assessing damages for defamation:

FC of T v Scully 2000 ATC 4111 at 4119 [28]; (2000) 201 CLR 148 at [28],

Graham v Robinson [1992] VR 279.

However, even accepting that some of the complaints of damage the applicant raised in the Federal Court proceeding consisted of anxiety and depression and thus personal injury', the Commissioner was correct in concluding there was no way of dissecting the total settlement sum to include an amount for such a payment:

McLaurin v FC of T (1961) 12 ATD 273; (1960-1961) 104 CLR 381."

46. The last sentence of [35] of the primary Judge's reasons contains a premise with which we agree. The occasion for apportionment pursuant to par 27A(1)(n) only arises if there can be said to be ''consideration of a capital nature for, or in respect of, personal injury to the taxpayer...''. Here, it is impossible to say whether there was or was not personal injury. AVCO denied it. The section does not provide for ''consideration... of, or in respect of, allegations of personal injury.'' As can be seen from the description of the allegations in the Federal Court proceedings and the terms of the deed, there was no agreement between the parties that Mr Dibb had suffered personal injury. It was submitted on his behalf (as it had to be) that the respondent was obliged to sit, in effect, as a tribunal to decide whether he suffered personal injury and if so, the amount of a reasonable payment therefor. We disagree. The respondent was correct, as was his Honour, in concluding that it was impossible to identify any part of the total sum of $788,544 as consideration for, or in respect of personal injury.

From these decisions, it can be seen that where a payment made is under a judicial decision, deed of settlement or similar instrument, for any part of that payment to be considered a reasonable amount:

Ÿ    the instrument must state that part of the payment is being made in respect of 'personal injury';

Ÿ    the payment made in respect of 'personal injury' must be calculated with reference to the effect of the injury on the taxpayer to earn future income from personal exertion; and

Ÿ    the amount being paid in respect of 'personal injury' should be specified.

It is not necessary, however, that the payment for personal injury be made separately from other payments made under a legal instrument.

Applying these principles to your circumstances, the lump sum amount you received is not considered to be a 'reasonable amount in respect of personal injury' based on the following reasons:

Ÿ    The settlement does not state that part of the payment being made to you was in respect of 'personal injury'.

Ÿ    You did not receive a lump sum payment calculated with reference to the effect of the injury to earn future income. As such, the nature of the personal injury suffered by you was not a factor that was considered in relation to the lump sum payment; and

Ÿ    The amount being paid in respect of 'personal injury' is not specified

In other words, there is no evidence that the payment was in any way calculated with regard to the nature of your personal injury and its likely effect on your capacity to derive income from personal exertion.

Conclusion

As all the requirements under paragraph 82-135(i) of the ITAA 1997 are not met, the payment you received is not exempt from tax, as a capital payment for, or in respect of, a personal injury.

The payment is an ETP in accordance with 82-130(1) of the ITAA 1997 and is taxed accordingly.

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