Edited version of private advice

Authorisation Number: 1052247846122

Date of advice: 7 May 2024

Ruling

Subject: Income lump sum compensation

Question

Is the lump sum amount paid to you by your former employer assessable under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997) as an employment termination payment (ETP)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You were employed by XXXX from XX 20XX.

You lodged a complaint for bullying by the XX of XXXX with XX (the former office of the Anti-Discrimination Commissioner) on XX XX 20XX.

XXXX engaged an external consultancy to address complaints about your behaviour in the workplace. A formal meeting to discuss the issue was held on XX XX 20XX.

You were offered a redundancy on XX XX 20XX by your employer.

You signed a Record of Agreement, the terms of which were that you be provided with a statement of your service for the period of your employment including positions you held, your duties and outcomes and that you agree to resign your employment with XXXX effective from XX XX 20XX.

The Agreement also releases and discharges all parties from any ensuing liability relating to either your complaint with the Anti-Discrimination commissioner or your employment with XXXX and constitutes a full and final settlement between the parties.

You were paid an amount of $XX on XX XX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 82-150

Reasons for decision

Division 82 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the main substantive rules governing the taxation of employment termination payments (ETPs). These are broadly defined in subsection 82-130 as payments that are received as a consequence of the termination of employment.

A payment is an ETP 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 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; and

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

Taxation Ruling IT 2003/13 Income tax: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' explains that the Commissioner considers that 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.

Employment termination payments do not include other termination payments such as unused annual or long service leave payments, redundancy payments, early retirement scheme payments or foreign termination payments. Nor do ETPs include superannuation benefits or pensions.

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 discussion in the ruling at paragraph 30 regarding severance payments such as golden handshakes is a demonstration of the circumstances where a payment is made 'in consequence of":

A severance payment that is made in respect of a taxpayer by a former employer after the termination of the taxpayer's employment, such as a golden handshake, is a payment that follows as an effect or result of the termination. Accordingly, the payment is made in consequence of the termination of employment. In such circumstances there is a causal connection between the payment and the termination of employment in that the payment would not have been made to the taxpayer but for the termination of the employment.

The payment of $XX to you by XXXX is conditional upon your agreement to resign from your position. The payment of $XX was made following the termination of your employment.

Application to your circumstances

In your case there was a dispute between you and XXXX.

The Record of Agreement between you and your former employer shows that XXXX would pay you $XX in satisfaction of all claims and entitlements and was conditional upon your agreement to resign your position, resulting in your employment being terminated. By signing the Agreement, you agreed to its terms and terminated your employment, effective from XX XX 20XX.

As the amount was paid to you in consequence of the termination of your employment it is assessable as an ETP under subsection 82-130(1) of the ITAA 1997.

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