Edited version of private advice

Authorisation Number: 1051568148097

Date of advice: 20 August 2019

Ruling

Subject: Employment termination payment

Question

Is any part of the Lump Sum made to you by an entity(the Employer) an employment termination payment (ETP) for the purposes of Division 82 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were employed by the Employer until early 20XX.

In late 20XX, you suffered from a medical condition.

Medical advice indicated that you would be unable to resume your previous workload and would be unfit for duty.

The Employer agreed to terminate your employment, subject to a payment to recognise your accrued but untaken sick leave.

A formal motion was passed by the Employer to discontinue your employment. The termination payment to be made to you was to include:

·         All leave entitlements including accrued annual leave, pro-rata long service leave and sick leave, but limited to six months; and

·         Would not include the payment of three months' salary in lieu of notice.

In early 2019, your employment was terminated.

Shortly afterwards, the final pay was processed and included:

·         Ordinary pay;

·         Accrued annual leave;

·         Long service leave;

·         Lump Sum.

In a Deed of Settlement and Release (the Deed), the Employer stated that they would pay a settlement amount.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 82

Income Tax Assessment Act 1997 section 82-10

Income Tax Assessment Act 1997 section 82-130

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 Lump Sum paid to you by the Employer is an ETP for the purposes of Division 82 of the ITAA 1997.

To the extent that the payment consists of a tax free component, it is not assessable income and is not exempt income.

The taxable component of the payment is assessable income and must be declared in the Taxpayer's income tax return for the relevant income year.

Detailed Reasoning

Employment termination payments

Division 82 of the ITAA 1997 sets out how ETP are treated for income tax purposes.

In accordance with section 82-130 of the ITAA 1997, a payment is 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.

In consequence of 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 contains references to repealed provisions, some of which may 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 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 this instance, your employment was terminated due to a medical condition and as a part of your termination payment you received lump sum amount. Therefore, there is causal connection between the termination and the payment. In this case, the termination is the pre-condition for the payment.

Based on the Commissioner's views expressed in TR 2003/13, there is, in this case, a clear connection between the termination of the Taxpayer's employment and the payment of the Lump Sum. That is, but for the termination, the Lump Sum would not be paid to the Taxpayer.

Consequently, the Lump Sum is 'in consequence of' the termination of the Taxpayer's employment with the Employer.

Payment is received no later than 12 months after termination

Your employment was terminated on in 2019, the final payment was processed a month later and you have received the payment. Therefore, the termination payment was received within 12 months of the termination of your employment.

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

Certain payments made on termination of employment are excluded from being an employment termination payment under section 82-135 of the ITAA 1997. These payments include any accrued annual and long service leave and the tax-free parts of a genuine redundancy payment or an early retirement scheme payment as well as certain other payments.

None of the amounts that make up the Lump Sum fall within a category under section 83-135 of the ITAA 1997.

Consequently, the Lump Sum is an ETP pursuant to section 82-130 of the ITAA 1997.

Taxation of employment termination payments

An ETP made may be comprised of the following components:

·         the tax fee component; and

·         the taxable component

Subsection 82-10(1) of the ITAA 1997, states that the 'tax free component' of a life benefit termination payment is not assessable income and is not exempt income.

Tax free component is defined in section 82-140 of the ITAA 1997 as so much of the ETP as consists of the following:

a.    the invalidity segment of the payment with the meaning of section 82-150 of the ITAA 1997;

b.    the pre-July 83 segment of the payment within the meaning of section 82-155 of the ITAA 1997.

Based on the information provided, it is unlikely that the Lump Sum will consist of a tax free component. That is, the payment will consist entirely of the taxable component.

Taxable component

Pursuant to section 82-10(2) of the ITAA 1997, the taxable component of a life benefit ETP is assessable income.

In accordance with section 82-145 of the ITAA 1997, the taxable component of an ETP is the amount remaining after deducting the tax free component from the total payment.

For recipients who have reached preservation age, the taxable component of an ETP is taxed at 17% for amounts below the ETP cap amount ($205,000 for the 2018-19 income year), and at the top marginal rate for amounts above the cap (subsection 82-10(3) of the ITAA 1997).

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