Edited version of private advice

Authorisation Number: 1051934595460

Date of advice: 19 January 2022

Ruling

Subject: Employment termination payment

Question

Is the payment that was paid to you by your Employer as part of a conciliation agreement (the Agreement) an employment termination payment (ETP) under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

Income year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

You were employed by your Employer.

You submitted a complaint against your Employer to Australian Human Rights Commission (AHRC).

The substance of your complaint was that your employer unlawfully discriminated against you and your service animal.

You allege that the discrimination was ongoing.

To resolve this complaint, you entered into the Agreement with your Employer.

A clause in the Agreement states that your Employer is to:

•      Pay you the net figure of the gross amount within a certain number of days of signing the Agreement and providing your Employer with a letter of resignation from your employment.

Your employment came to an end with your signing the Agreement and subsequent resignation.

Another clause in the Agreement provides that you forego any right to take action, claims or proceedings against your Employer from the time of signing the Agreement.

You received a payment from your Employer.

Your Employer withheld a tax from this payment.

You contend that as the amount was paid for general damages, no tax should have been withheld.

You request a refund of the withheld amount from the ATO.

Relevant legislative provisions

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 Paragraph 82-130(1)(b)

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

Income Tax Assessment Act 1997 Section 82-135

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).

Taxation Ruling IT 2424 Income tax: compensation payments in respect of unlawful acts of discrimination (TR 2424)

Reasons for decision

Summary

The payment that was paid to you by your Employer as part of the Agreement is an ETP under section 82-130 of the ITAA 1997 and thus included in your assessable income for the relevant income year.

Accordingly, this payment is not excluded payment for, or in respect of, personal injury listed under paragraph 82-135(i) of the ITAA 1997.

Detailed reasoning

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.

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.

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) sets out the Commissioner's views on when a payment is made 'in consequence of' termination of employment. Paragraphs 5 and 6 of TR 2003/13 state:

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.

Taxation Ruling IT 2424 Income tax: compensation payments in respect of unlawful acts of discrimination (IT 2424) provides the Commissioner's view on compensation payments.

Paragraph 17 of IT 2424 states:

Any settlement between parties or a determination of the Commission resulting from the discriminatory conduct would usually require the removal of the discriminatory terms, conditions or benefits of employment. Compensation may be agreed upon or awarded for loss or damages suffered in the intervening period.

While paragraph 24 of IT 2424 states:

A compensation payment received by way of settlement or under a determination of the Commission in respect of an unlawful act of dismissal qualifies as an eligible termination payment. Essentially, the compensation payment for unlawful dismissal, like a payment for wrongful dismissal settled or awarded under a common law action, is considered to be made "in consequence of the termination of any employment of the taxpayer". The payment falls within the definition of an eligible termination payments and is liable for income tax in accordance with the special eligible termination rules.

As you contend that the agreed payment shouldn't be taxed as it was made to you for 'general damages', we need to assess the available facts to determine if this payment represents a compensation payment in respect of personal injury listed under paragraph 82-135(i) of the ITAA 1997 or an ETP.

In consequence of your employment

Clause of the provided Agreement states that "without any admission of liability" your Employer agrees to:

•         Pay you the net figure of the gross amount within a certain number of days of signing the Agreement and providing your Employer with a letter of resignation from your employment.

You resigned from your position after signing the Agreement.

The above-mentioned clause of the Agreement and your resignation support that there is a casual connection between the termination/resignation of/from your employment and the payment. Without your resignation the payment would not have been made. For this reason, we consider that the payment was made in consequence of the termination of your employment, meeting requirement of subparagraph 82-130(1)(a)(i) of the ITAA 1997.

Payment received no later than 12 months after termination

You resigned after signing the Agreement and received your payment shortly after. The payment was made within 12 months of your termination, thereby satisfying paragraph 82-130(1)(b) of the ITAA 1997.

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

Accordingly, consideration needs to be given if this payment is specifically excluded under section 82-135 of the ITAA 1997 (thereby not satisfying paragraph 82-130(1)(c)).

Paragraph 82-130(1)(c) of the ITAA 1997 specifies that an ETP does not include payments mentioned in section 82-135 of the ITAA 1997. An exclusion under paragraph 82-135(i) of the ITAA 1997 refers to capital payments for personal injury that are paid to individuals as a compensation for their inability to be employed.

In Re Luke and Federal Commissioner of Taxation [2011] AATA 801; (2011) 2011 ATC 10-216; the Administrative Appeals Tribunal (AAT) accepted that the taxpayer had been adversely affected by what they perceived to be unreasonable harassment and discrimination in their employment but said that 'personal injury' does not extend 'beyond physical injury and mental illness to include emotional hurt'.

The AAT added that:

Evidence is required that the payment had some form of identifiable and unambiguous connection with a personal injury, for which compensation was necessary as a reflection of the fact that the applicant's capacity to derive income from personal exertion had been impaired.

In view of the above, a physical and/or mental injury would require diagnosis by a qualified medical practitioner to fall within the meaning of 'personal injury'. The payment must also be calculated by reference to the nature of the injury and the extent to which the injury will affect your capacity to derive income from employment.

You contend that the agreed payment relates to your claim for harassment and humiliation. Your Employer has denied these allegations. Neither you nor the Agreement provide evidence, medical qualification or clarification to support that this payment was made to you to compensate you for a personal injury.

Conversely, the information and evidence you provided support that the payment, paid to you by your Employer as part of the Agreement, meets all requirements under subsection 82-130(1) of the ITAA 1997. Accordingly, we are satisfied that this payment is an ETP and thus included in your assessable income for the relevant income year.

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