Edited version of your written advice

Authorisation Number: 1051183083313

Date of advice: 23 January 2017

Ruling

Subject: Employment termination payment

Question 1

Is an ex-gratia payment to be made by an entity (the Employer) to a former employee (the Employee) under the terms of a 'Settlement and release deed', an employment termination payment and therefore subject to withholding tax obligations pursuant to section 12-85 of Schedule 1 of the Tax Administration Act 1953 (TAA)?

Answer

Yes

This ruling applies for the following periods:

Income year ending 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The Employee commenced employment with the Employer in the 20AA-BB income year.

Sometime in 20CC, the Employee and the Employer commenced discussions about the prospect of the Employee moving into a 'Global Role'. The Global Role was a regulated role in an overseas country, such that the Employee was required to meet a test of being a 'fit and proper person'.

Soon after, the Employee was involved in a number of incidents involving inappropriate behaviour which caused concerns in the overseas office of the Employer with regard to the Employee being a 'fit and proper person' for the purposes of the applicable regulatory requirements in the overseas country.

Consequently, in the 20CC-DD income year, the Employer advised the Employee that their employment was terminated with immediate effect.

Following the termination of the employment with the Employer, the Employee filed a General Protections Application Involving Dismissal in the Fair Work Commission (the Application) alleging that the Employer had contravened certain sections of the Fair Work Act 2009 and committed a breach of employment contract. The Employee alleged financial loss and sought pecuniary remedies.

Several months later, the parties agreed to settle all matters between them arising out of the employment, the termination and the Application.

The terms of the settlement between the parties are contained in the Settlement and release deed (the Deed) and include the following:

● The Employer will pay to the Employee an ex-gratia payment (the Payment) in exchange for an agreement from the Employee not to pursue any further Claims (including the Application or any proceedings that may flow from the Application.

● The Payment will be paid subject to the terms of the Australian Taxation Office (ATO) Private Ruling within 14 days of the ATO Private Ruling being received by the Employer.

● The Employee acknowledges that the payments under the Deed are paid in full satisfaction of all obligations of the Employer towards the Employee (including, but not limited to, the Employment Benefits.

● 'Employment Benefits' includes all benefits in respect of the Employment, including but not limited to salary, annual leave, long service leave, sick leave, bonuses, shares, superannuation, allowances, severance and redundancy payments).

● The Employee unconditionally releases the Employer from all 'Claims' the Employee has now or may have had in the future if the parties had not executed the Deed.

● 'Claims' means all actions, claims, demands, suits proceedings, liabilities, sums of money, damages and costs arising from the Application, the Employment, the Termination, the Employment Agreement, the Employment Benefits, any act or omission of the Employer during the employment, any other claim or combination of any of these.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-85 of Schedule 1

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Subsection 82-130(1)

Income Tax Assessment Act 1997 Subparagraph 82-130(1)(a)(i)

Income Tax Assessment Act 1997 Paragraph 82-130(1)(b)

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Subsection 955-1(1)

Reasons for decision

Summary

The Payment to be paid by the Employer to the Employee is an employment termination payment for the purposes of section 12-85 of Schedule 1 of the TAA.

Detailed reasoning

In accordance with section 12-85 of Schedule 1 to the TAA, an entity must withhold an amount from any of the following payments it makes to an individual:

(a) a superannuation lump sum;

(b) a payment that is an employment termination payment or would be except that it is received more than 12 months after the termination of employment.

Employment termination payments

By virtue of subsection 995-1(1) of ITAA 1997, employment termination payments are defined in subsection 82-130(1) of the ITAA 1997, which 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) it is not a payment mentioned in section 82-135.

Therefore, a payment will be an ETP if all the conditions in subsection 82-130(1) of the ITAA 1997 are satisfied. Failure to satisfy any one of the conditions under subsection 82-130(1) will result in the payment not being treated as an ETP.

Paid 'in consequence of' the termination of 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 the 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 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. 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 the present case, the Employee was dismissed by the Employer. As a result of the dismissal, the Employee filed the Application which lead to the settlement, as a result of which, the Employee is to the Payment.

Hence, it is our view that the Payment would be received by the Employee in consequence of the termination of their employment with the Employer because there is a sequence of events following the termination which has a relationship and connection which ultimately leads to the Payment. That is, the Payment is a consequence of the settlement, which is a consequence of the Application, which in turn is a consequence of the termination of the Employee's employment.

In your application for a Private Ruling, you contend that the Payment is in the nature of a general damages payment to remedy losses arising from the Employer's alleged conduct generally, not merely in relation to the termination of employment, and cannot be regarded as having been made 'in consequence of' employment because:

● at the time of the termination, a number of the Employee's claims existed and could have been pursued regardless of the Employee's employment being terminated,

● the Application was concerned mostly to recover alleged financial losses suffered by the Employee on account of their alleged reliance on alleged misrepresentations by the Employer,

● the alleged contraventions associated with the dismissal formed part of the totality of the circumstances in respect of the employment relationship but were not the dominant cause of financial loss for which remedies might be awarded.

While it may be true that a number of claims existed and could have been pursued by the Employee regardless of the termination of their employment, it is sufficient, in this case, that the subject matter of the Application was the termination. As stated by the Commissioner in paragraph 6 of TR 2003/13, the termination need not be the dominant cause of the Payment.

Therefore, it is considered that the Payment would be received by the Employee in consequence of the termination of their employment with the Employer as required by subparagraph 82-130(1)(a)(i) of the ITAA 1997.

The Payment is to be paid to the Employee within 14 days of this Private Ruling being received by the Employer therefore; the payment will be received by the Employee within 12 months after the termination of their employment as required by paragraph 82-130(1)(b) of the ITAA 1997.

However, it should be noted that 12 month rule in subsection 82-130(1) of the ITAA 1997 does not apply to termination payments for the purposes of section 12-85 of Schedule 1 to the TAA.

Finally, section 82-135 of the ITAA 1997 lists payments that are not ETPs, none of which applies in this case.

Therefore, the Payment that the Employee will receive from the Employer is an ETP for the purposes of section 12-185 of Schedule 1 to the TAA.