Edited version of your written advice

Authorisation Number: 1012988267654

Date of advice: 22 March 2016

Ruling

Subject: Employment termination payment

Question

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

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

In early 200X, you commenced employment with the Employer.

In the relevant income year your employment was terminated by the Employer.

Subsequent to your termination of employment you made a Statement of Claim to the Court where you sought payment for redundancy, unpaid reasonable notice of termination, pre-judgement interest, and the imposition of penalty to the Employer.

In early 20XX an Order (the Order) was issued by the Court under the relevant regulations.

The Order signed by you and the Employer states in part that the Employer is indebted to you to a lump sum amount, and upon the payment of this amount that the application is discontinued.

You state that within one month of the Order, the Employer deposited the lump sum amount into your bank account.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 82-10(3)

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-135

Reasons for decision

Summary

The payment is a taxable component of an employment termination payment to be included in your assessable income for the relevant income year.

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 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.

Failure to satisfy any of the three conditions will result in the payment not being considered an employment termination payment. Furthermore, any termination payments received outside of the 12 months 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.

To determine if the payment constitutes an employment termination payment, the following examination has been made to determine whether all the relevant conditions in section 82-130 of the ITAA 1997 have been satisfied.

Paid as a consequence of the termination of your employment

The phrase 'in consequence of the termination of your employment' is not defined in the legislation. However, both the Courts and the Commissioner have considered the meaning of this phrase.

In Taxation Ruling TR 2003/13 the Commissioner has considered the meaning of the phrase 'in consequence of'.

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.

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).

In Reseck Justice Gibbs stated:

Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination… It is not my opinion necessary that the termination of the services should be the dominant cause of the payment.

While Justice Jacobs stated:

It was submitted that the words 'in consequence of' import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a 'following on'.

In looking at the phrase 'in consequence of' the Full Federal Court in McIntosh considered the decision in Reseck.

Justice Brennan considered the judgments of Justice Gibbs and Justice Jacobs in Reseck and concluded that their Honours were both saying that a causal nexus between the termination and payment was required, though it was not necessary for the termination to be the dominant cause of the payment.

Suffice it to say that 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.

Furthermore, in Le Grand v Federal Commissioner of Taxation [2002] FCA 1258; (2002) 124 FCR 53; (2002) 195 ALR 194; (2002) 2002 ATC 4907; (2002) 51 ATR 39 (Le Grand), the issue before the court was whether an amount received by the applicant as a result of accepting an offer of compromise in respect of claims brought by him against his former employer, in relation to the termination of his employment was in whole, or in part, an ETP. It was held that a settlement payment for litigation in relation to a taxpayer's dismissal was an ETP.

Justice Goldberg stated:

I am satisfied that there is a sufficient connection between the termination of the applicant's employment and the payment to warrant the finding that the payment was made "in consequence of the termination" of the applicant's employment. I am satisfied that the payment was an effect or result of that termination in the sense that there was a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment.

Justice Goldberg concluded that the test for determining when a payment is made in consequence of the termination of employment is that which was articulated by Justice Gibbs in Reseck. Thus, for the payment to have been made in consequence of the termination of employment, the payment must follow as an effect or result of the termination of employment. As earlier stated in paragraph 6 of TR 2003/13, there must be 'a causal connection between the termination and the payment even though the termination need not be the sole or dominant cause of the payment'.

Paragraph 31 of TR 2003/13 the Commissioner states:

It is clear from the decision in Le Grand, that when a payment is made to settle a claim brought by a taxpayer for wrongful dismissal or claims of a similar nature that arise as a result of an employer terminating the employment of the taxpayer, the payment will have a sufficient causal connection with the termination of the taxpayer's employment. The payment will be taken to have been made in consequence of the termination of employment because it would not have been made but for the termination.

The essence of this analysis is that if the payment follows as an effect or a result 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.

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.

In this case, you were employed at the Employer for period from 200X until your termination in the relevant income year.

Following your termination of employment, you submitted a Statement of Claim to a court where you sought payment for redundancy, unpaid reasonable notice of termination, pre-judgement interest, and the imposition of penalty to the Employer.

In the Order issued by the Court, the Employer consented to pay you a sum of in settlement of your claims against the Employer. This Order was signed by both the Employer and yourself.

The Order stated that on payment of this amount, the application of complaint against the Employer will be discontinued.

The facts provided show that the payment was made 'in consequence of the termination of employment'. The termination and the payment are intertwined and connected, and the payment would not have been made but for the termination of employment. Therefore the first requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

The payment is received no later than 12 months after termination

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

In your case, the payment was made within 12 months following your termination from employment on dd/mm/yyyy. Therefore, the payment satisfies the requirements of paragraph 82-130(1)(b) of the ITAA 1997.

The final requirement under paragraph 82-130(1)(c) of the ITAA 1997 is that the payment is not a payment mentioned in section 82-135.

Exclusions under 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;

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

In this case, the amount of made to you is a single undissected lump sum payment. The facts provided show that the payment did 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.

Consequently, it is considered that the payment is not of a type mentioned in section 82-135 of the ITAA 1997. As the payment is not it is not a payment mentioned in section 82-135, the requirement of subparagraph 82-130(1)(c) of the ITAA 1997 is met.

As all the conditions in section 82-130 of the ITAA 1997 have been satisfied, the amount is considered to be an employment termination payment.

Tax treatment of an employment termination payment

An employment termination payment may comprise of the following components:

_ Tax fee component - this includes the post-June 1994 invalidity or pre-July 83 component (if any); and

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

In your case, as the period of employment to which the payment relates commenced after 1 July 1983, the payment does not have a pre-July 83 segment.

In addition, as the payment was not made by reason of you ceasing gainful employment as a result of suffering from ill-health, there is no invalidity segment for the purposes of section 82-150 of the ITAA 1997.

Accordingly, the payment is a taxable component of an employment termination payment to be included in your assessable income for the relevant income year.

As you were over your preservation age when the payment was made, and the payment is under the employment termination payment cap of $185,000 (for the relevant income year), you are entitled to a tax offset that ensures that the rate of income tax on the amount does not exceed 15% in accordance with subsection 82-10(3) of the ITAA 1997. In addition, the Medicare levy may apply.