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Edited version of your written advice
Authorisation Number: 1051349804034
Date of advice: 22 March 2018
Ruling
Subject: Whole-of-income employment termination payment
Question
Will the taxable component of your eligible termination payment (ETP) be excluded from the whole-of-income cap under paragraph 82-10(6)(d) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No
This ruling applies for the following period:
The scheme commenced on:
1 July 2016
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
1. You commenced employment with the Employer in November 2010 and ceased in December 2016.
2. You have stated that in a meeting in September 2016, you were advised by the Employer that the staff had ‘lost confidence in your leadership’ and the ‘time had come for a change of leadership for the Office’. You were advised to resign and accept a remuneration package, or be performance managed out of the role.
3. Both you and the Employer resorted to seeking legal advice during the process.
4. You and the Employer came to an agreement, and a Deed of Separation was signed in November 2016.
5. The Deed of Separation terms included the resignation of your employment in December 2016 in exchange for an agreed termination payment.
6. You did not receive a formal Notice of Termination from the Employer and no formal reasons have been given to you detailing why the Employer wanted to terminate your employment.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 82-10
Reasons for decision
Detailed reasoning
7. Employment termination payments (ETP) are concessionally taxed up to a capped limit. In accordance with subsection 82-10(3) of the ITAA 1997, you are entitled to a tax offset that ensures the rate of tax does not exceed either 15% or 30% of the taxable component of your ETP amount that is mentioned in subsection 82-10(4). Any part of an ETP you receive that exceeds the cap may be taxed at the top marginal rate of 46.5%.
8. There are two caps, the ETP cap and the whole-of-income cap. The ETP cap is $195,000 for the 2016-17 income year (indexed) reduced by any earlier ETPs paid in the same income year. The whole-of-income cap is $180,000 minus other taxable income you earn throughout the income year.
9. Which cap applies depends on the type of payment.
10. Subsection 82-10(4) of the ITAA 1997 states that the ETP cap will apply to an ‘excluded payment’. For all other ‘non-excluded’ ETPs you will apply the lesser of the ETP cap and the whole of income cap (in most cases this will be the whole of income cap).
11. Under paragraph 82-10(6)(d) of the ITAA 1997 an excluded payment includes a payment that is in connection with a genuine dispute; and is principally compensation for personal injury, unfair dismissal, harassment or discrimination; and exceeds the amount that could, at the time of the termination of your employment reasonably be expected to be received by you in the consequence of the voluntary termination of your employment.
12. Payments that are made principally to compensate a person for a genuine dispute from personal injury, unfair dismissal, harassment or discrimination are excluded from the whole-of-income cap. A payment does not need to be made as a result of proceedings before a court to be deemed as compensation, however evidence will need to substantiate that a genuine dispute existed.
13. You entered into a Deed of Separation (the Deed) with the Employer in November 2016 and resigned from employment with effect in December 2016.
14. In December 2016 you were paid an ETP.
15. You have argued that the ETP should not be included under the whole-of-income cap as it is a payment made primarily in respect of a genuine dispute for unfair dismissal.
16. While it may be inferred that the size of the payment indicates that the Employer wished to compensate you in relation to the termination of your employment, there is insufficient evidence to substantiate that this was due to a genuine dispute. Based on the information provided:
● There is no mention in the Deed as to the reasons why the Employer wanted to terminate your employment.
● There is no mention in the Deed as to your dispute with the Employer
● No correspondence or documentation from the Employer has been provided establishing their reasons for wanting to terminate your employment.
● Your minutes of the meetings detailing the Employer’s grievances with your employment are not verified by the Employer.
17. Documentation you have provided indicates that you originally did not want to end your employment relationship, however during the period from October to November 2016 you were in negotiation with the Employer in regards to the terms of a potential payout.
18. The Deed is evidence that the termination of your employment arose as a result of both parties agreeing to terms.
19. Prior to signing the Deed, you were not dismissed from employment, therefore the Deed did not result as a consequence of a dismissal or the termination of employment. Rather, it was your voluntary resignation of employment that arose from signing the Deed.
20. Further, the Deed provides that in return for the payment, you release the Employer from any claims you may have arising out of your employment or the cessation of that employment. Again, it is noted that no documentary evidence from the Employer in relation to the termination of employment, nor the Deed itself, make mention of an unfair dismissal or dispute. The Employer has made no finding or admission in respect of the payment being made as compensation for an unfair dismissal.
21. Based on the available information we are unable to conclude that the payment was in connection with a genuine dispute that was principally compensation for unfair dismissal.
22. As the payment does not meet the conditions of subsection 82-10(6) of the ITAA 1997, it cannot be excluded from the whole-of-income cap calculation.