Edited version of private ruling

Authorisation Number: 1011886921685

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Ruling

Subject: Settlement payment

Questions

Is the payment you received under a deed an employment termination payment?

Advice/Answers

Yes

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

Your employment with was terminated in the 2009-10 income year.

You commenced proceedings against your employer alleging underpayment of annual leave superannuation.

You commenced legal proceedings within 12 months of the termination of your employment.

Your employer denied any liability for the amounts you claimed.

In a deed (the Deed) an agreement was made to irrevocably and unconditionally release and forever discharge your employer from any claim and to file Notices of Discontinuance of proceedings. This release stated that it included claims arising out of the termination of your employment.

In accordance with the Deed you received a payment in the 2010-11 income year.

The payment was made to you more than 12 months after the termination of your employment.

The payment does not include any of the payments which are excluded from being an employment termination payment

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130.
Income Tax Assessment Act 1997 Subsection 82-130(1).
Income Tax Assessment Act 1997 Paragraph 82-130(1)(a).
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 Subsection 82-130(2).
Income Tax Assessment Act 1997 Paragraph 82-130(4)(a)
Income Tax Assessment Act 1997 Subsection 82-130(7)
Income Tax Assessment Act 1997 Section 82-135.
Income Tax Assessment Act 1997 Subsection 82-155(1).
Income Tax Assessment Act 1997 Section 83-295
Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Summary

The payment made under the Deed is an employment termination payment as:

· it was made in consequence of the termination of your employment.

· you commenced legal proceedings within 12 months of your employment termination

· it is not a payment which is excluded from being an employment termination payment.

Detailed reasoning

Employment termination payment

The definition of an employment termination payment is defined under section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Section 995-1 states:

employment termination payment has the meaning given by section 82-130.

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

A payment is an employment termination payment if:

· it is received by you:

· in consequence of the termination of your employment; or

· after another persons death, in consequence of the termination of the other persons employment; and

· it is received no later than 12 months after the termination (but see subsection (4)); and

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

Payment is made in consequence of the termination of employment

The first condition to be met is that there must be a payment that is made in consequence of the termination of employment of the taxpayer.

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the phrase 'in consequence of termination of employment' has been interpreted by the courts in several cases.

Of note are the decisions made by the High Court in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325 (McIntosh).

Both Courts views were that for a payment to be made in consequence of the termination of employment it had to follow on as a result or effect of the termination of employment. Additionally, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient.

The Commissioner has issued Taxation Ruling TR 2003/13 (TR 2003/13) which discusses the meaning of the phrase, taking into account the views of the courts.

In paragraph 5 of TR 2003/13 the Commissioner states:

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.

As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be:

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 made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

Therefore, if the payment follows as an effect or results from the termination of employment, the payment will be made in consequence of the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. Hence, the payment will be an employment termination payment unless the payment is specifically excluded under section 82-135 of the ITAA 1997.

In this case your employment with was terminated in the 2009-10 income year.

You commenced proceedings against your employer alleging underpayment of annual leave superannuation.

In a deed (the Deed) an agreement was made to irrevocably and unconditionally release and forever discharge your employer from any claim and to file Notices of Discontinuance of proceedings.

In accordance with the Deed you received a payment in the 2010-11 income year.

From the facts it can been seen that you commenced legal proceedings against your employer in relation to your claims. Your employer denied any liability for the amounts you claimed. In settlement of any claims a payment was made under the Deed. In consideration of the payment you agreed to release your employer from claims in relation to the termination of your employment.

Therefore, it is evident that the payment was made in consequence of your termination of employment. The termination of employment, the Deed and the payment are all intertwined and connected.

The payment is, therefore, considered to be received by you in consequence of the termination of your employment. The requirement under subparagraph 82-130(1)(a) of the ITAA 1997 has been met.

The payment is received no later than 12 months after termination

The second condition for the payment to be an employment termination payment is stated in paragraph 82-130(1)(b) of the ITAA 1997. The payment must be received within 12 months of the employee's termination of employment, unless they are covered by a determination exempting them from the 12 month rule.

The payment was made to you more than 12 months after the termination of your employment. Therefore, it would ordinarily not qualify as an employment termination payment and would be taxed as ordinary income at marginal tax rates under the terms of section 83-295 of the ITAA 1997.

However, by virtue of paragraph 82-130(4)(a) of the ITAA 1997, the 12 month rule prescribed in paragraph 82-130(1)(b) of the ITAA 1997 will not apply to you if you are covered by a determination made by the Commissioner under either subsection 82-130(5) or subsection 82-130(7) of the ITAA 1997.

In accordance with subsection 82-130(7) of the ITAA 1997 the Commissioner issued a legislative instrument on 12 November 2007 titled Employment Termination Payments (12 month rule) Legislative Instrument 2007.

This instrument explains in paragraph 4:

Paragraph 82-130(1)(b) of the Income Tax Assessment Act 1997 does not apply to a late termination payment if the payment is received more than 12 months after the termination of a person's employment because:

(a) legal action was commenced within 12 months of the termination of employment, of which the subject is either or both:

i) the person's entitlement to the payment;

ii) the amount of the person's entitlement

The Explanatory Statement to this instrument states, at paragraph 7, that:

... Legal action is intended to cover any Court, Tribunal and other proceedings of a judicial or quasi-judicial nature which may result in the payment of an amount in consequence of the termination of a person's employment.

In this case, as you commenced legal proceedings within 12 months of your employment termination, the 12 month rule will not be applicable to your payment.

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

Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. These include (among others):

· superannuation benefits;

· unused annual leave or long service leave payments;

· foreign termination payments covered under Subdivision 83-D of the ITAA 1997; and

· the tax free part of a genuine redundancy payment or an early retirement scheme payment.

In this case, the facts provided show that the payment does not include any of the payments mentioned in section 82-135 of the ITAA 1997 which would preclude any part of the payment from being an employment termination payment.

The payment you received was not broken up in any way, specifying an amount paid in respect of unpaid superannuation or unused annual leave. It was a lump sum to cease legal action. Therefore, it can not be said that the payment is for any payment specified in section 82-135 of the ITAA 1997.

As the payment satisfies all the conditions in section 82-130 of the ITAA 1997, it is an employment termination payment.

Tax Treatment of the employment termination payment

An employment termination payment made after 1 July 2007 will be comprised of the following components:

· Tax free component this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and

· Taxable component the amount remaining after deducting the tax free component from the total payment.

The tax free component is not assessable income and is not exempt income. The taxable component is included, in full, as assessable income.

The taxable component is subject to tax, depending on the person's age when the settlement payment is received.

For recipients under preservation age, the taxable component of an employment termination payment is taxed at no more than 30% plus Medicare levy for amounts below the employment termination payments cap of $160,000 for the 2010-11 income year and at the top marginal rate for amounts above the cap.

For recipients at or above preservation age, the taxable component of an employment termination payment is taxed at no more than 15% plus Medicare levy for amounts below the employment termination payments cap of $150,000 for the 2010-11 income year and at the top marginal rate for amounts above the cap.

Employment termination payments are recorded at item 4 'Employment termination payments (ETP)' of your individual tax return for the relevant income year. Item 4 requires you to fill in the date of the payment, the payer's Australian Business Number, the tax withheld and the taxable component.