Edited version of your written advice

Authorisation Number: 1051201062725

Date of advice: 13 March 2017

Ruling

Subject: Employment termination payments

Question

Is any part of the payment made to the Taxpayer in settlement of legal proceedings brought against the Employer, assessable as an employment termination payment in accordance with 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 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The Taxpayer submitted a claim for compensation alleging they suffered injury arising out of or in the course of her employment with the Employer.

The Employer’s insurer rejected the Taxpayer’s claim.

The Taxpayer filed an Application for Review with the South Australian Employment Tribunal.

The Taxpayer and the Employer agreed to settle their dispute under a Release and Discharge Agreement (the Agreement).

The terms of the Agreement include the following:

● The Taxpayer resigns from their employment with the Employer.

● The insurer will pay to the Taxpayer the Settlement Sum within 7 days of it receiving a duly executed copy of the Agreement.

● The Employer will pay any accrued entitlements to annual leave or long service leave less tax deducted within 7 days of receiving the Taxpayer’s notice of resignation.

● The Taxpayer releases absolutely and discharges both the insurer and Employer arising in any way concerning or in the course of the Taxpayer’s employment with the Employer.

● The Taxpayer acknowledges that by tendering her resignation from employment and by executing the Agreement that the Employer is relieved of any obligation to offer suitable employment pursuant to Section 18(1) of the Return to Work Act 2014.

The Taxpayer signed the Agreement.

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 Section 82-130

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

Income Tax Assessment Act 1997 subsection 82-130(4)

Income Tax Assessment Act 1997 subsection 82-130(7)

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 section 82-140

Income Tax Assessment Act 1997 section 82-145

Income Tax Assessment Act 1997 section 82-150

Income Tax Assessment Act 1997 section 82-155

Income Tax Rates Act 1986 Schedule 7

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

Reasons for decision

Summary

The Settlement Sum paid to the Taxpayer is an employment termination payment (ETP) as defined in section 82-130 of the ITAA 1997 and is taxed accordingly.

Detailed reasoning

Employment termination payments

In accordance with subsection 82-130(1) of the ITAA 1997, a payment is an 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 the termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

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

Payment received in ‘consequence of’ the termination

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 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect 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.

Relevantly, at paragraph 31 of TR 2003/13, the Commissioner considers payments made to settle wrongful dismissal and 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 Settlement Sum was agreed to be paid to the Taxpayer conditional on her resignation of employment with the Employer. Had it not been for the termination of employment, the Settlement Sum would not have been paid.

Based on the above, we consider that the Settlement Sum was paid to the Taxpayer in consequence of the termination of her employment.

Payment received within 12 months of termination

The Taxpayer agreed to resign from her employment. The Agreement states that the Settlement Sum will be paid to the Taxpayer within 7 days of execution of the Agreement. The Agreement was signed by the Taxpayer within 12 months of her resignation.

As the payment will be made within 12 months after the termination, the condition in paragraph 82-130(1)(b) of the ITAA 1997 is met.

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

Section 82-135 of the ITAA 1997 lists certain payments that are not ETPs.

Relevantly, subsection 82-135(i) mentions a capital payment for, or in respect of, personal injury to you so far as the payment is reasonable having regard to the nature of the personal injury and its likely effect on your capacity to derive income from personal exertion.

It is considered that the Settlement Sum was paid in order to resolve the dispute with the Employer rather than for personal injury suffered by the Taxpayer.

Hence, the amount awarded to the Taxpayer is not included in the list, therefore this condition is satisfied.

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’.

Taxation Ruling IT 2424 Income tax: Compensation payments in respect of unlawful acts of discrimination