Edited version of your written advice

Authorisation Number: 1013002229922

Date of advice: 12 May 2016

Ruling

Subject: Employment termination payment - excluded payments

Question

Is any part of the payment that the taxpayer received from their former employer an excluded payment under subsection 82-10(6) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

During the relevant income year, the taxpayer's employment with the employer was terminated.

The taxpayer submitted to the Fair Work Commission an application for relief from Unfair Dismissal.

Later during the relevant income year, the taxpayer and the employer agreed to fully and finally settle the matter in accordance with the terms of settlement.

According to the terms of settlement:

• The employer will pay to the taxpayer a sum of money, taxed as an employment termination payment, in addition to any monies previously paid to the taxpayer by the employer.

• The employer will, pursuant to the relevant Australian Workplace Agreement, pay the taxpayer an amount for accrued personal leave.

• The employer will rescind the dismissal and allow the taxpayer to have resigned on the termination date.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-10

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

Income Tax Assessment Act 1997 Subsection 82-10(2)

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

Income Tax Assessment Act 1997 Subsection 82-10(4)

Income Tax Assessment Act 1997 Subsection 82-10(5)

Income Tax Assessment Act 1997 Subsection 82-10(6)

Income Tax Assessment Act 1997 Paragraph 82-10(6)(d)

Income Tax Assessment Act 1997 Subsection 82-10(7)

Reasons for decision

Summary

A part of the payment received by the taxpayer was paid as compensation in connection with a genuine dispute for unfair dismissal. Therefore, that portion is an excluded payment under subsection 82-10(6) of the ITAA 1997 and only the ETP cap applies to this amount.

The remainder of the payment, being the amount for accrued personal leave pursuant to the Australian Workplace Agreement, is not an excluded payment under subsection 82-10(6) of the ITAA 1997. The lesser of the ETP cap and the whole-of-income cap applies to this amount.

Detailed reasoning

Taxation of employment termination payments

The taxation of employment termination payments is outlined in section 82-10 of the ITAA 1997.

Subsections 82-10(1) of the ITAA 1997 states that the 'tax free component' of a life benefit termination payment is not assessable income and is not exempt income. In accordance with subsection 82-10(2) of the ITAA 1997, the 'taxable component' is assessable income.

However, an ETP is taxed at a lower (concessional) rate, in accordance with subsection 82-10(3) of the ITAA 1997, up to a certain 'cap' amount. Subsection 82-10(3) of the ITAA 1997 states:

(3) You are entitled to a * tax offset that ensures that the rate of income tax on the amount mentioned in subsection (4) does not exceed:

(a) if you are your * preservation age or older on the last day of the income year in which you receive the payment--15%; or

(b) otherwise--30%.

*To find definitions of asterisked terms, see the Dictionary, starting at section 995-1

Subsections 82-10(4) and (5) of the ITAA 1997 outline how the 'cap' amount is worked out. According to these subsections, the 'cap' amount is either:

• the ETP cap amount (reduced by the amount of any earlier ETPs received in the same income year), or

• the lesser of:

i. the ETP cap amount (reduced by the amount of any earlier ETPs received in the same income year); and

ii. the whole-of-income cap amount (being $180,000 minus other taxable income earned throughout the year).

Excluded payments

According to paragraph 82-10(6)(d) of the ITAA 1997, for certain specified ETPs, only the ETP cap will apply (as opposed to the lesser of the ETP amount and the whole-of-income cap amount). These ETPs are known as 'excluded payments' and relevantly include payments that:

(i) are paid in connection with a genuine dispute; and

(ii) are principally compensation for personal injury, unfair dismissal, harassment, discrimination or a matter prescribed by the regulations; and

(iii) exceed the amount that could, at the time of the termination of your employment, reasonably be expected to be received by you in consequence of the voluntary termination of your employment.

In the current case, the taxpayer received an ETP in accordance with two clauses of the terms of settlement. A portion of this payment clearly satisfies the conditions under paragraph 82-10(6)(d) of the ITAA 1997. Not only was the amount paid in connection with a genuine dispute that was submitted to the Fair Work Commission, but the amount was also paid in addition to any monies previously paid to the taxpayer by the employer. Furthermore, the source of the dispute was the taxpayer's allegation of unfair dismissal and the payment can principally be categorised as compensation for this issue.

The fact that the terms of settlement states that the dismissal will be rescinded and the taxpayer allowed to resign on the date of termination does not change the character of the payment. The rescinding of the dismissal is merely one of several remedies to the dispute. It does not change the fact that there was a genuine dispute or that a dismissal had occurred.

On the other hand, the other portion of the payment, being the amount paid for accrued personal leave, does not satisfy the conditions under subsection 82-10(6) of the ITAA 1997. This is because the amount was paid in accordance with the taxpayer's Australian Workplace Agreement and does not exceed the amount that the taxpayer would have received if the termination had been voluntary.

Since the ETP received by the taxpayer was partly an excluded payment, subsection 82-10(7) of the ITAA 1997 applies to treat the payment as two payments as:

(i) first, a payment consisting only of the part of the payment that is an excluded payment;

(ii) second, another payment, made immediately after the first payment, consisting only of the part of the payment that is not an excluded payment; and

(b) subsection (4) applies to the second payment as if a reference in subsection (5) to the taxable component of a payment were a reference to so much of the taxable component as relates to the part of the payment that is not an excluded payment.

In other words, the taxpayer will be treated as having received two separate ETPs, an excluded payment for which ETP code R must be used on the taxpayer's tax return, and a non-excluded payment for which ETP code O must be used. The taxpayer may record this information of their tax return by completing an Employment termination payment schedule (NAT 71744).