Edited version of your written advice

Authorisation Number: 1051287336702

Date of advice: 4 October 2017

Ruling

Subject: Settlement for unfair dismissal

Question

Is the $X settlement payment from the Employer for unfair dismissal an Employment Termination Payment (ETP)?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20YY

The scheme commences on:

1 July 20XY

Relevant facts and circumstances

You were employed by the Employer from a date in early 19XX to a date in early 20YY.

You lodged an unfair dismissal claim against the Employer and an agreement was reached as per the Deed of Settlement dated at a date in mid-20YY.

The case was settled with an agreed payment amount which was received on a date in mid- 20YY.

No payment summary was issued and no tax was withheld

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 Section 83-175

Reasons for decision

Summary

The payment you received as settlement for your unfair dismissal claim is an ETP as it is in consequence of your employment and made within 12 months of your termination.

Detailed reasoning

The requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy payment under section 83-175 of the ITAA 1997 are discussed in Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2).

With regard to the first requirement set out in subsection 83-175(1) of the ITAA 1997, the Commissioner of Taxation (the Commissioner) considers that there are four necessary components within this requirement:

● The payment must be received in consequence of an employee's termination.

● That termination must involve the employee being dismissed from employment.

● That dismissal must be caused by the redundancy of the employee's position.

● The redundancy payment must be made genuinely because of a redundancy.

None of the information provided indicates you were dismissed because of a redundancy so the Commissioner considers your payment is not a genuine redundancy payment. However, the payment may be an ETP and taxed accordingly.

Section 82-130 of the ITAA 1997 states a payment is an employment termination payment if:

(a) it is received by you:

(i) in consequence of the termination of your employment

…

(b) it is received no later than 12 months after the termination; and

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

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 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 31 and 32 of TR 2003/13, Settlement of litigation proceedings, the Commissioner states:

31. 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.

32. The Federal Court in Dibb v. FC of T adopted the approach of Goldberg J in Le Grand. At issue was whether a payment received by the taxpayer under a deed of release, following the settlement of Federal Court proceedings against his former employer, was an ETP. In deciding the payment was an ETP, Heery J held that the length of time between the termination of employment, the commencement of court proceedings and payment following settlement did not sever the causal connection between the termination and the payment. It was sufficient that the subject matter of the litigation was the termination. Heery J found at 296 that:

'The various causes of action whether breach of contract, conspiracy, breach of fiduciary duty or contravention of the Trade Practices Act were, as Goldberg J would say (Le Grand at [36]), 'interwoven and intertwined' with the termination. The payment was a consequence of the settlement, which was a consequence of the Federal Court proceeding, which in turn was a consequence of the termination.'

In this case, you commenced employment with the Employer on a date in early 19XX and as described in the Deed, on a date in late 20YZ, while in the course of your employment you sustained a severe injury.

On a date in early 20YY your employment was terminated by the Employer and you lodged an unfair dismissal application with the Fair Work Commission.

As a result of the above, a settlement amount was reached with no admission of liability. As per the Deed, you and the Employer agreed to settle any and all issues, claims and/or disputes between you arising out of or in connection with the Employment, the Incident, the Relevant Employment Tribunal (RET) proceedings and the unfair dismissal proceedings, including any and all claims at law and/or in equity arising at any time now or in the future, and any and all claims to costs as against each other in connection therewith, in accordance with the terms set out in this Deed, though saved for an industrial entitlements such as long service leave and annual leave.

Whilst the received payment does not meet the full definition of a genuine redundancy, it does meet the definition of an Employer termination payment (ETP).

Your settlement payment is considered to be in consequence of the termination of your employment and was made within 12 months after termination. It is not a payment mentioned in section 82-135 so the Commissioner considers it is an ETP.

ETPs are concessionally taxed up to a certain limit, or 'cap'. The top rate of tax applies to amounts in excess of the cap. Therefore, in your case, the $X settlement amount is deemed to be an ETP and will be subject to the ETP cap. As you are under preservation age, it will be taxed at a maximum rate of 32% up to the ETP cap which for the 20XY-YY income year was $X.