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Date of advice: 27 November 2015

Ruling

Subject: Employment termination payment

Question

Is the payment received by the taxpayer, as a result of legal action, an employment termination payment in accordance with subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20ZZ

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

Your client commenced employment with the Employer in the 19UU-VV income year.

In the 20WW-XX income year the Employer offered redundancy packages to some of its employees.

Your client accepted the redundancy package and was paid a termination lump sum in the 20WW-XX income year. This payment included a taxable component of $[amount]. The total tax withheld was $[amount].

Within six months of your client's termination of employment legal proceedings on behalf of a number of employees, including your client, were commenced against the Employer.

Agreement was reached between the parties to resolve the proceedings in a confidential deed (the Deed).

In the 20YY-ZZ income year your client signed a Deed Poll which was made in accordance with the Deed.

In accordance to the Deed Poll, the Employer paid your client a lump sum payment in the 20YY-ZZ income year. A PAYG payment summary - employment termination payment shows:

Taxable component $[amount]

Total tax withheld $[amount]

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(4).

Income Tax Assessment Act 1997 Subsection 82-130(7)

Reasons for decision

Summary

The payment received by your client as a result of legal action is an employment termination payment as:

(a) the 12 month rule does not apply to the payment; and

(b) the other conditions for it to be an employment termination payment are satisfied.

Detailed reasoning

Employment termination payment

A payment is an employment termination payment (ETP) if the payment satisfies all the requirements in section 82-130 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 that termination (but see subsection (4)); and

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

In this case, the lump sum payment of $[amount] (the payment) was made to your client following legal proceedings against the Employer. These proceedings were instigated due to your client's termination of employment.

The legal action, the termination of employment and the payment are all intertwined and connected. Therefore, the payment received by your client in the 20YY-ZZ income year was in consequence of the termination of his employment.

Payment received more than 12 months after termination

In addition to meeting the other conditions for a payment to be an ETP, paragraph 82-130(1)(b) of the ITAA 1997 specifies that a payment must be received within 12 months of the termination of employment, unless subsection 82-130(4) of the ITAA 1997 applies to allow the exemption from the 12 month rule.

Paragraph 82-130(4)(a) of the ITAA 1997 states:

Paragraph (1)(b) does not apply to you if:

You are covered by a determination under subsection (5) or (7);

Subsection 82-130(7) of the ITAA 1997 states:

The Commissioner may, by legislative instrument, determine that paragraph (1)(b) does not apply to either or both of the following, as specified in the determination:

(a) a class of payments;

(b) a class of recipients of payments.

The Employment Termination Payments (12 month rule) Legislative Instrument 2007 is a determination made under subsection 82-130(7) of the ITAA 1997, which has been registered by the Commissioner on the Federal Register of Legislative Instruments.

In accordance with paragraph 3 of the determination entitled Application, it will apply to a payment received by a person after 30 June 2007 if the payment is received:

(a) either

(i) in consequence of the termination of that person's employment, or

(ii) after another person's death, in consequence of the termination of that other person's employment; and

(b) more than 12 months after that termination; and

(c) is not a payment under section 82-135 of the Income Tax Assessment Act 1997.

Where these conditions are satisfied, the payment is referred to in the determination as a late termination payment.

In accordance with paragraph 4 of the instrument entitled Determination, paragraph 82-130(1)(b) of the ITAA 1997 will 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; or

(b) the payment was made by a liquidator, receiver or trustee in bankruptcy of an entity that is otherwise liable to make the payment, where that liquidator, receiver or trustee is appointed no later than 12 months after the termination of employment.

In this case, legal action commenced within 12 months of your client's termination of employment. Accordingly, the payment is exempt from the 12 month rule found in paragraph 82-130(1)(b) of the ITAA 1997.

In view of the above, and the facts show the rest of the conditions in section 83-130 of the ITAA 1997 are satisfied, the payment made to your client is an ETP.

Taxation of multiple ETPs over multiple income years

The ETP cap reduces each time an ETP that is related to the same termination of employment is received, even if multiple payments are received over different income years. This prevents splitting payments to avoid the ETP cap.

The ETP cap for the 20YY-ZZ income year is $185,000. Accordingly, as your client received an earlier ETP in relation to the same termination of employment, the ETP cap is reduced.

Furthermore, concessional tax treatment is limited to the smaller of either the ETP cap or the whole-of-income (WOI) cap. Amounts paid in excess of these caps are taxed at the highest marginal rate.

The WOI cap only applies on a year-by-year basis. The WOI cap is $180,000 (non-indexed) minus other taxable income your client earned throughout the income year. Tax losses will not be taken into account when working out the WOI cap.