Edited version of your written advice

Authorisation Number: 1051299583164

Date of advice: 10 November 2017

Ruling

Subject: Employment termination payment

Question

Is the lump sum payment received by you an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

You were previously employed by a former employer (the former employer).

Your last official day at work was during the 2016-17 income year.

You made an application to the Fair Work Commission for unfair dismissal in which the former employer initially denied such allegations.

In the 2016-17 income year you and your former employer entered into a settlement (the Settlement).

In the Settlement it was agreed to fully and finally settle the matter on the following basis:

● Your former employer would pay you a lump sum payment (the Payment) gross, taxed as a redundancy payment, in addition to any other monies previously paid to you by your former employer.

● The dollar amount stated in the terms of settlement would be paid by your former employer to you within a week of signing the terms of settlement from both parties.

● The dollar amount specified in the terms of settlement would be paid by your former employer into your nominated financial account.

The Payment amount, less 17% tax, was paid into your bank account in the 2016-17 income year.

The former employer included the Payment as a Label D lump sum payment on your PAYG Payment Summary for the 2016-17 income year.

You are over 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130,

Income Tax Assessment Act 1997 Section 82-135,

Reasons for decision

Summary

The lump sum payment (the Payment) made in relation to your unfair dismissal claim is determined to be an employment termination payment. As you are over your preservation age, and the lump sum payment is below the ETP cap, the payment is taxed at a rate of 17%.

Detailed reasoning

Employment termination payments are defined in subsection 82-130(1) of the Income Tax Assessment Act 1997 (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.

Section 82-135 of the ITAA 1997 specifies payments that are not ETPs and these include:

● Superannuation benefits

● Unused annual leave or long service leave payments

● Foreign termination payments covered under Subdivision 83-D and

● The tax free part of a genuine redundancy payment or an early retirement scheme payment.

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

Taxation Ruling 2003/13 Income tax: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase ‘in consequence of’ (TR 2003/13) sets out the commissioner’s view on if a payment made is ‘in consequence of” a termination of employment. Paragraphs 5 and 6 of TR 2003/13 states:

5…The Commissioner considers that a payment is received by a taxpayer ‘in consequence of’ the termination of the taxpayer's employment 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 received by 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.

Payments made in regards to settlement of litigation are considered as made ‘in consequence of’ the termination of employment. This is noticeably outlined in TR 2003/13 under paragraph 31 which states:

31…It is clear from the decision in Le Grand, 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.

In your case, it is considered that the Payment paid you to settle the unfair dismissal proceedings initiated by you against your former employer was ‘in consequence of’ the termination of your employment as there was a causal connection between the termination and the settlement payment amount.

Therefore, as the Payment was made in consequence of the termination of employment and it was paid within 12 months of your termination, subparagraph 82-130(1)(c)(i) and paragraph 82-130(1)(b) of the ITAA 1997 are satisfied respectively.

Further, there is no evidence to show that the payment is specifically excluded from being an ETP under section 82-135 of the ITAA 1997 (thereby satisfying paragraph 82-130(1)(c)). Though the Settlement made reference that the payment be treated as a redundancy, subparagraph 83-170(2)(a)(i) would precludes any part of the payment being a genuine redundancy payment as you were over 65 years when the payment was made.

Accordingly, the Payment paid to you from your former employer is an ETP under section 82-130 of the ITAA 1997 as all of the conditions for it to be an ETP have been satisfied. Therefore, the payment is to be included in your tax return for the 2016-17 income year as an ETP.

As the lump sum payment is below the ETP cap, and you have reached your preservation age of 55 years, the full amount of the payment is taxed at a rate not exceeding 17%.

Preservation age table and withholding rates for ETPs schedule can be found within the ATO website in page numbers QC 52077 in the left panel and QC 26218 under Tax table for employment termination payments.