Edited version of your written advice

Authorisation Number: 1013136688780

Date of advice: 22 December 2016

Ruling

Subject: Employment Termination Payment

Question

Are you eligible for a tax offset under subsection 82-10(3) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the termination payment received by you?

Answer

Yes

This ruling applies for the following period:

Income year ending 30 June 20ZZ

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

You were employed on a casual basis by the Employer.

The start and end date of your employment was specified in an employment contract (the Contract) as spanning the 20XX-YY and 20YY-20ZZ income years.

Your employment with the Employer was terminated in the 20YY-ZZ income before the end of the term of the Contract.

You made a claim that the dismissal was wrongful and sought for compensation related to loss of remuneration.

In the 20YY-ZZ income year, you and the Employer agreed to fully and finally settle the matter in accordance with a Deed of Release (the Deed).

In the Deed references were to matters arising out of or related to your employment by the Employer, the termination of your employment your claim for loss or remuneration as a result of that termination.

The Deed also stated that in full and final settlement of the Claim, the Employer will pay you the sum of $XXXX less any amount required to be withheld by the law.

A certain percentage of the total settlement sum was withheld by the Employer for remission to the Australian Tax Office.

You are above your preservation age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-10

Income Tax Assessment Act 1997 Section 82-130

Reasons for decision

Summary

The payment received by you is an employment termination payment.

Further, in view of the facts provided, you are entitled to a tax offset which ensures the rate of income tax on the settlement payment does not exceed 15%. When taking into account the Medicare Levy, if applicable, the rate of tax on the payment should not exceed 17%.

Employment termination payment

Subsection 82-130(1) of the 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) (c) It is not a payment mentioned in section 82-135

To treat a payment as an ETP, all conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any one of the conditions under subsection 92-130(1) will results in the payment not being treated as an ETP

Paid 'in consequence of' the termination of your employment

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 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 (TR 2003/13).

While TR 2003/13 considers 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 use the term 'in consequence of' in the same manner.

In paragraphs 5 and 6 of TR 2003/13, the Commissioner states:

5… 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.

6. The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment…

In the 20YY-ZZ income year, in accordance with a Deed of Release (the Deed), a lump sum amount was paid to you to settle the unfair dismissal proceedings initiated by you against your former Employer (the Employer).

As shown in the Deed, this lump sum amount was paid in full and final settlement of all claims arising out of your employment with the Employer, the termination of employment and the unfair dismissal claim.

The payment was made 'in consequence of' the termination of your employment as there is a causal connection between the termination and the payment of the settlement sum. The termination, the unfair dismissal proceedings and the payment are intertwined.

Therefore, the payment of was made in consequence of the termination of employment as defined in subparagraph 82-130(1)(a)(i).

Payment received no later than 12 months after termination

Paragraph 82-130(1)(b) of the ITAA 1997 specifies that the payment must be received within 12 months of the employee's termination of employment, unless they are covered by a determination exempting them from the '12 month rule'.

In your case, your employment terminated in the 20YY-ZZ income year and the payment that arose from the termination was made shortly after the Deed was entered into, also in the 20YY-ZZ income year. Therefore, the payment was received no later than 12 months after the termination of your employment.

A payment mentioned in section 82-135 of the ITAA 1997

As previously mentioned, section 82-135 of the ITAA 1997 excludes certain payments from being employment termination payments. These payments include:

● a payment for unused annual leave

● a payment for unused long service leave

● capital payments for personal injury.

In your case, the facts provided show that the payments you received 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 ETP.

Taxation of employment termination payments

The taxation of ETPs 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:

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

In view of you being over your preservation age, and the facts provided, you are entitled to a tax offset that ensures the rate of income tax on the payment does not exceed 15%. When taking into account the Medicare Levy, if applicable, the rate of tax on the payment should not exceed 17%.