Authorisation Number: 1052376210172

Date of advice: 07 April 2025

Ruling

Subject: Employment termination payment

Question 1

Is the payment received by you in accordance with the Deed of Separation an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

Relevant facts and circumstances

You were employed by the Employer.

The Employer terminated your employment relating to non-compliance with your employment agreement.

You commenced legal proceedings with the Employer.

A Deed of Separation (the Deed) was signed by you and the Employer. Without admission of liability, the parties entered into the Deed for the purpose of resolving all matters in dispute arising out of or in connection with the proceedings.

As per the terms of the Deed, the Employer made a settlement payment to you.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 82-135

We followed these ATO view documents

Taxation Ruling 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'.

Reasons for decision

A payment is an employment termination payment (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(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.

Paid as '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. Taking into account the courts' decisions on the meaning of the 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).

Paragraphs 5 and 6 of TR 2003/13 state that:

5.... 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.

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.

At paragraph 32 of TR 2003/13, the Commissioner considers payments from a former employer to settle litigation:

32. The Federal Court in Dibb v. FC of T[1] 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 payments in these cases were ETPs because there was a sequence of connected events following the termination, which ultimately led to the payment. The payments would not have been made but for the termination.

In this case, there was a dispute between you and the Employer regarding the termination of your employment for non-compliance with your employment Agreement and the subsequent damages to your reputation. You engaged solicitors seeking damages from the Employer.

You and the Employer agreed to settle the claim and your differences under the terms of the Deed. Your settlement payment is conditional upon releasing and discharging the Employer from any claim or liability in relation to those matters. Both parties have given no admission of liability, as stated in the Deed

While the settlement of the legal proceedings is the direct cause of the payment, the proceedings were commenced by you as a result of the termination of your employment. That is, there was a sequence of events following the termination which ultimately led to the payment being made under the Deed. The termination, the legal proceedings and the payment were all intertwined.

The payment would not have been made but for the termination of your employment. Therefore, it is considered that the payment was received by you in consequence of the termination of your employment.

As such, the requirement of subparagraph 82-130(1)(a)(i) of ITAA 1997 has been satisfied.

Payment received no later than 12 months after termination

Paragraph 82-130(1)(b) of the ITAA 1997 requires that the payment must be received no later than 12 months after the termination of employment.

Your employment with the Employer ended during the 2025 income year, and the payment was received during the 20XX income year. This requirement is considered satisfied.

Payments mentioned in section 82-135 of the ITAA 1997

Paragraph 82-130(1)(c) of the ITAA 1997 specifies that an ETP does not include a payment mentioned in section 82-135.

Your settlement payment is not a payment mentioned in subsection 82-135 of the ITAA 1997.

Conclusion

The payment received by you from the Employer is an employment termination payment in accordance with section 82-130 of the ITAA 1997.

[1] (2003) 53 ATR 290

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