Edited version of private advice

Authorisation Number: 1051765264312

Date of advice: 26 October 2020

Ruling

Subject: Employment termination payment

Question

Is the settlement payment made by your employer an employment termination payment in accordance with section82-130 of the Income Tax Assessment Act1997 (ITAA1997)?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were employed as a Payroll/HR Officer on a part-time basis.

Your employment was terminated by your Employer.

You filed an Unfair Dismissal Application with the Fair Work Commission, alleging that you had been unfairly dismissed.

Your Employer denies the allegations made by you in the Unfair Dismissal Application.

Without admission of liability, you and your Employer have agreed to settle on the terms specified in the settlement deed (Deed).

Under the Deed, your Employer will within 3 days of you returning a copy of this Deed duly executed,

·         Pay you the sum of $xx,xxx.

·         provide you a statement of service outlines the role you held with the Employer and the tasks you performed in these roles.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-135

Reasons for decision

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

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

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 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 received by a taxpayer in consequence of the termination of the taxpayer's employment 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 received by 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.

The facts need to show there is a direct causal connection between the payment and a termination of employment. If a termination of employment does not occur, then an employee is not entitled to the payment.

In this case, your employment was terminated by your Employer. If there was no termination of employment, you would not have filed the Unfair Dismissal Application with the Fair Work Commission and you would not have received this settlement payment. The Settlement Sum is paid by your Employer without admission of liability. This payment is made in consequence of the termination of your employment.

Payment received no later than 12 months after termination

The payment was made within 12 months after 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:

·         payment for unused annual leave

·         payment for unused long service leave

·         reasonable capital payments for personal injury.

The payment was to settle all claims you may have had against the Employer for wrongful dismissal, rather than to compensate for injuries. The settlement payment was also not for unused annual leave or unused long service leave.

As section 82-135 of the ITAA 1997 does not apply, the requirement in paragraph 82-130(1)(c) is satisfied.

Consequently, the settlement payment is considered to be an employment termination payment as the payment satisfies all the requirements in section 82-130 of the ITAA 1997, and is not specifically excluded under section 82-135. It should be included in your assessable income for the relevant income year.

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