Edited version of your written advice

Authorisation Number: 1012907054948

Date of advice: 9 November 2015

Ruling

Subject: Employment termination payment

Question 1

Is an amount for pain, suffering and humiliation to be made under a deed of settlement and release an employment termination payment?

Answer

No.

Question 2

Is the Employer obliged to withhold tax from the payment pursuant to section 12-85 of the Tax Administration Act 1953 (TAA)?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20YY.

The scheme commences on:

1 July 20XX.

Relevant facts and circumstances

Prior to the 20XX-20YY income year the taxpayer commenced employment with an employer (the Employer).

Prior to the 20XX-20YY income year, the taxpayer made an internal complaint about discriminatory statements and behaviours towards them by other employees. The Employer investigated and concluded its investigation.

The taxpayer was dissatisfied with the investigation process and outcome, which they claim was also discriminatory.

The Employer raised concerns with the taxpayer about their conduct and performance. Subsequent to this, the Employer terminated the taxpayer's employment.

The taxpayer brought a claim in the Fair Work Commission against the Employer. When the claim failed to settle, the taxpayer commenced Federal Court proceedings against the Employer complaining about both the discriminatory statements and termination of employment.

During the 20XX-20YY income year, the taxpayer and the Employer executed a settlement and release deed (the deed), whereby the Employer acknowledged that some discriminatory statements were made to the taxpayer which caused them pain and suffering.

In accordance with the deed, the Employer is required to pay a settlement sum which comprises:

1. a payment for legal expenses;

2. an additional ex gratia gross payment to the taxpayer in respect of the termination; and

3. a payment of a gross amount to the taxpayer for pain, suffering and humiliation as a result of the discriminatory statements and in respect of the settlement of the discrimination allegations made during employment (Payment X).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 82-135

Taxation Administration Act 1953 Section 12-85 of Schedule 1

Reasons for decision

Summary

The payment for pain, suffering and humiliation (Payment X) paid under the deed is not an employment termination payment as it is not a payment made in consequence of termination of employment.

As Payment X is not a superannuation lump sum nor an employment termination payment, the Employer is not required to withhold tax from the payment under section 12-85 of Schedule 1 to the Taxation Administration Act 1953 (TAA)

Detailed reasoning

Employment termination payment

Subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that a payment is an employment termination payment (ETP) 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.

To determine if a payment is an ETP, all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any of the conditions under subsection 82-130(1) will result in the payment not being considered an ETP.

Furthermore, any termination payments received more than 12 months after the termination will be taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12 month rule.

Paid as a 'consequence of' the termination of your employment

For a payment to be treated as an ETP, the first condition that must be met is that the payment 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 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).

While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of the eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner.

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.

Accordingly, it must be demonstrated that, but for the termination of employment, the payment would not have been made.

In the current case, the taxpayer was employed by the Employer. Subsequently, the taxpayer commenced proceedings against the Employer complaining about both the termination of employment and discriminatory statements made against them.

The taxpayer and the Employer entered into a deed whereby the Employer agreed to pay a settlement sum comprising of a payment for pain, suffering and humiliation (Payment X).

The settlement sum also included a payment for legal costs and an ex gratia payment in respect of the termination of employment.

In accordance with paragraphs 5 and 6 TR 2003/13, a payment is made in consequence of termination of employment if the payment would not have been made but for the termination of employment. Further, a causal connection between the termination and the payment is required and termination need not be the dominant cause of the payment.

The dominant cause of Payment X being made from the Employer to the taxpayer is to compensate for the pain, suffering and humiliation which occurred as a result of the discriminatory statements and allegations made during their employment.

The deed clearly states that the amount is for pain, suffering and humiliation. This is in clear contrast to the remaining components of the settlement sum.

The discriminatory statements and subsequent discriminatory allegations occurred between before the termination of employment. Therefore they could have made the claim even while they were employed. Had the taxpayer made the claim while they were still employed they would have received the payment while continuing their employment with the Employer.

Therefore the requirement under subparagraph 82-130(1)(a) of the ITAA 1997 has not been met and the payment in question, Payment X, is not in consequence of the termination of employment. Accordingly the remaining requirements of section 82-130 of the ITAA 1997 do not need to be considered.

PAYG tax withholding

Section 12-85 of Schedule 1 to the TAA states an entity must withhold an amount from any of the following payments it makes to an individual:

(a) a superannuation lump sum;

(b) a payment that is an employment termination payment or would be one except that it is received more than 12 months after termination of employment.

In this case the payment for pain, suffering and humiliation paid under the deed is not a superannuation lump sum nor is it an employment termination payment as it is not a payment made in consequence of termination of employment.

As neither condition under section 12-85 of Schedule 1 to the TAA has been met there is no obligation on the Employer to withhold tax from the payment.