Edited version of your written advice

Authorisation Number: 1012725379479

Ruling

Subject: Employment termination payment

Question

Is the employment termination payment you received under a settlement agreement to be included in your assessable income for the 20YY income year?

Answer

Yes

This ruling applies for the following period:

Income year ending 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your employment with the employer was terminated during the 20XX income year.

You filed a complaint with an anti-discrimination commission against the employer.

During the 20YY income year, a settlement deed was executed between the employer and yourself. The deed states that the employer agrees to pay you a settlement sum 'in full and final settlement of all matters (to the extent permitted by law) relating to the Employment, including the termination of the Employment, and the Complaint'.

Some days later, the employer paid the settlement sum as required by the deed.

You received a 'PAYG payment summary - employment termination payment' in relation to the settlement sum for the year ending 30 June 20YY.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-10(3)

Income Tax Assessment Act 1997 division 82

Income Tax Assessment Act 1997 subsection 82-10(1)

Income Tax Assessment Act 1997 subsection 82-130(1)

Reasons for decision

Summary

The employment termination payment (ETP) you received is to be included as assessable income in the 20YY financial year even though the termination of your employment occurred in a previous income year. ETPs are assessable in the year in which the payments are received.

Detailed reasoning

The taxation of ETPs is governed by division 82 of the Income Tax Assessment Act 1997 (ITAA 1997). According to subsection 82-10(1) of the ITAA 1997, ETPs have a taxable component which must be included as assessable income in your tax return.

The definition of an ETP is outlined in subsection 82-130(1) of the ITAA 1997, which states that:

(1) A payment is an employment termination payment if:

(a) it is received by you:

(i) in consequence of the termination of you 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 (emphasis added)

This means that until a payment is 'received by you', it cannot be classified as an ETP. This in turn means that there would be no taxable component with respect to the amount until the amount has been received.

In your case, the payment from the employer occurred in the 20YY income year. Therefore, the payment is assessable in the 20YY income year.

It is important to note that in certain circumstances, an ETP can be included as assessable income before it is received through the operation of subsection 6-10(3) of the ITAA 1997, which states that:

(3) If an amount would be statutory income apart from the fact that you have not received it, it becomes statutory income as soon as it is applied or dealt with in any way on your behalf or as you direct.

However, in your case, you were not entitled to the ETP amount, which is statutory income, until the date the settlement deed was signed and executed, which was in the 20YY income year. This therefore means that it would not be possible for anyone to apply or deal with the amount 'on your behalf' or 'as you direct' until that date. As such, it would not be possible in this case for the amount to be assessable prior to the 20YY income year.