Edited version of your written advice

Authorisation Number: 1013030445190

Date of advice: 7 June 2016

Ruling

Subject: Employment termination payments

Is the payment to the taxpayer an employment termination payment in accordance with section 82-130 of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period:

Income year ending 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

An individual (the Taxpayer) is under age 60.

The Taxpayer was employed with a company (the Employer) until the termination of their employment during the relevant income year.

The Taxpayer commenced a General Protections application against the Employer in the Fair Work Commission, as the Taxpayer alleged that they were wrongfully terminated by the Employer.

The Taxpayer and the Employer agreed to settle all matters between them as per the deed of release.

Under the deed of release, the Employer agreed to pay the Taxpayer a certain amount (less applicable tax) within 10 days of receipt of an executed copy of the deed.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-10

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

Superannuation Industry (Supervision) Regulations 1994 subregulation 6.01(2)

Reasons for decision

Summary

The payment to the Taxpayer under the deed of release is an employment termination payment.

Detailed reasoning

Employment termination payment (ETP)

A payment made to an employee is an ETP if it satisfies all the conditions set out in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997).  This section states:

(1) 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.

To determine if a payment constitutes an ETP, all the conditions in section 82-130 of the ITAA 1997 must be satisfied.

Failure to satisfy any of the conditions under subsection 82-130(1) of the ITAA 1997 will result in the payment not being considered an ETP.

Paid as a consequence of the termination of your employment

For a payment to be treated as an ETP, there must be a payment that is made in consequence of the termination of employment of the taxpayer, according to subparagraph 82-130(1)(a)(i) of the ITAA 1997.

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this 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.

In this case, the Employer terminated the Taxpayer's employment and as a result, a settlement was reached by the two parties after a dispute regarding the termination. As such, it can be said that but for the termination of employment, the payment would not have been made to the Taxpayer.

Therefore, it is considered that the above payment was made in consequence of the termination of the Taxpayer's employment.

Payment is received no later than 12 months after termination

In this case, the Taxpayer's employment was terminated and the Taxpayer initiated their action against their Employer, resulting in the payment of an amount under the deed soon after termination

Therefore, as the payment was made within 12 months after the termination date this condition is satisfied.

Payment is not a payment mentioned under section 82-135 of the ITAA 1997

Section 82-135 of the ITAA 1997 provides a list of certain payments that are not ETPs.

As the amount awarded to the Taxpayer is does not fall under any of the categories mentioned in section 82-135 of the ITAA 1997, this condition is satisfied.

Taxation of ETP

An ETP may be made up of two components: the 'tax-free component' and the 'taxable component'.

In accordance with section 82-10 of the ITAA 1997, the tax-free component of an ETP is not assessable income and is not exempt income. That is, it is tax-free.

However, under section 82-140 of the ITAA 1997, the tax-free component of an ETP consists of the invalidity segment of the payment and the pre-July 83 segment of the payment. Hence, there is no applicable tax-free component, in this case.

The taxable component of the ETP is assessable, however a tax offset, which depends on a person's age, applies.

If a person is under their 'preservation age', subsection 82-10(3) of the ITAA 1997 applies to ensure that the rate of tax payable on the taxable component, up to a certain 'cap' amount, does not exceed 30% (plus Medicare levy).

In this case, the relevant cap amount is the ETP cap, which is $195,000 in the 2015-16 income year.

Preservation age is defined in regulation 6.01(2) of the Superannuation Industry (Supervision) Regulations 1994. The Taxpayer is under their preservation age in this case.

ATO view documents

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)