Edited version of your written advice

Authorisation Number: 1051448745225

Date of advice: 12 November 2018

Ruling

Subject: Employment termination payment

Question

Is the lump sum payment of $XXX paid to you by your former employer in settlement of litigation proceedings an employment termination payment under 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 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The taxpayer commenced employment with the Employer.

The taxpayer was employed in the position of Sales Manager and held this position up until the date they were terminated.

The Employer advised the taxpayer in writing that their employment was terminated due to poor performance in sales.

The taxpayer filed a general protections claim with the Fair Work Commissioner for conciliation with the Employer. The claim alleged that the Employer had taken adverse action and discriminated against the taxpayer.

The Fair Work Commissioner claim was unsuccessfully conciliated before a Fair Work Commission conciliator.

The taxpayer filed a claim with the Federal Circuit Court of Australia, seeking remedy that the Employer pay $XXX compensation for lost income and $XXX in damages for distress and humiliation.

The taxpayer and the Employer negotiated a settlement and agreed that the Employer would pay $XXX on agreement that the court proceedings be withdrawn.

The Employer then provided the taxpayer with a Deed of Release which the taxpayer signed.

The Employer issued an employment termination payment PAYG payment summary to the taxpayer, showing a taxable component of $XXX and tax withheld of $XX. The rate of tax withheld is 32%.

Reasons for decision

Employment termination payment

1. A payment is an employment termination payment if it satisfies all the requirements in section 82-130 of the ITAA 1997 and is not specifically excluded under section 82-135 of the ITAA 1997.

2. Subsection 82-130(1) 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; 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.

Paid ‘in consequence’ of the termination of employment

3. 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) states, at paragraphs 5 and 6 that:

5....the Commissioner considers that 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.

4. While TR 2003/13 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect.

5. Whether payments made in respect of a taxpayer as a result of settlement of litigation arising out of the termination of the taxpayer’s employment, is made ‘in consequence of’ the termination of employment is specifically addressed in TR 2003/13. According to paragraph 31 of TR 2003/13:

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.

6. The taxpayer was advised by the Employer they were being terminated from their employment due to poor performance in sales in their role as Sales Manager.

7. The taxpayer filed a general protections claim with the Fair Work Commissioner for conciliation with the Employer. The claim alleged that the Employer had taken adverse action and discriminated against the taxpayer.

8. The general protections claim with the Fair Work Commissioner commenced after termination.

9. The subject of the general protections claim (Claim) deals with:

● the taxpayer has not been able to secure any employment since being terminated

● the taxpayer has suffered a loss of income, distress and humiliation due to the actions of the Employer

● the taxpayer seeks compensation of six months base salary which equates to $XXX and a further $XXX in damages for distress and humiliation

● the taxpayer seeks the Employer pay a pecuniary penalty pursuant to civil remedy provisions of the Fair Work Act 2009 (the Act)

● the taxpayer seeks the Employer be ordered to pay an amount of $XXX pursuant to sections 539 and 546 of the Act due to breaches of the general protections provisions of the Act.

10. The cause of action, whether there was a breach of contract or not, was connected to the termination. The termination created a conflict between the taxpayer and the Employer, which led to the taxpayer’s decision to commence Fair Work Commission proceedings against the Employer, largely for, the deprivation of future employment income.

11. The Fair Work Commission claim was unsuccessfully conciliated before a Fair Work Commission conciliator, and the taxpayer subsequently filed a claim with the Federal Circuit Court of Australia, seeking remedy that the Employer pay $XXX compensation for lost income and $XXX in damages for distress and humiliation.

12. The taxpayer and the Employer negotiated a settlement and agreed that the Employer would pay $XXX on agreement that the court proceedings be withdrawn. The taxpayer signed the Deed of Release.

13. The Employer issued an employment termination payment PAYG payment summary to the taxpayer, showing a taxable component of $XXX and tax withheld of $XXX. The rate of tax withheld is 32%.

14. To use the language of Le Grand, the relevant question to ask is whether the payment would have been made ‘but for’ the termination of the taxpayer’s employment. In this case, the Deed was entered into for the settlement of the Proceedings under which the taxpayer claimed damages for losses which primarily arose from termination. In other words, but for the termination of employment, the taxpayer would not have been entitled to claim for loss of base remuneration, loss of additional income through sales commission and loss of future employment income. As such, the sum paid to the taxpayer in settlement of litigation proceedings followed as an effect or result of the termination.

15. It is acknowledged that a claim for distress and humiliation was also a subject of the Claim. It is also accepted that this damage for distress and humiliation may have primarily occurred prior to the termination, which in turn ensures that the claim for damage for distress and humiliation would not have been ‘in consequence of’ your termination. However, as per Dibb v FC of T (2003) ATC 4613 (Dibb’s case), where there are damages claimed under a variety, or multiple heads of damage, there is no way of dissecting an un-dissected total settlement sum so that it can be apportioned amongst the several heads of damage to which it relates.

16. In Dibb’s case, Mr Dibb commenced legal action against his former employer in relation to the termination of his service agreement, alleging there was a breach of his service agreement, breach of the fiduciary duty of trust and confidence, breach of the Trade Practices Act 1974 (Cth) and that his former employer and their lawyers conspired to terminate his employment without ‘proper cause or warning’. Mr Dibb sought damages for amounts due under the service agreement to the date of termination that were unpaid, future economic loss, physical and mental injury and diminution of amenities, injury to employment reputation, exemplary damages, interest and costs. The parties agreed to settle the claim, entering into a deed of release for the payment of a settlement sum to Mr Dibb. Heerey J held that at 4617, the payment under the deed of release was made in consequence of the termination of Mr Dibb’s employment with his former employer.

…The various causes of action, whether breach of contract, conspiracy, breach of fiduciary duty or contravention of the Trade Practices Act were … “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.

17. The payment of the settlement sum under the Deed was therefore made ‘in consequence of’ the termination of the taxpayer’s employment. ‘In consequence of the termination’ requires that termination be a cause, but not necessarily a dominant cause of a payment. There is a causal connection between the termination and the payment of the settlement sum. The termination, the legal proceedings and the payment are intertwined.

Payment must be received no later than 12 months after termination

18. As it has been determined that the settlement sum, $XXX was received in consequence of termination of employment, paragraph 82-130(1)(b) of the ITAA 1997 of the definition of employment termination payment also requires that the amount is paid within 12 months of termination.

19. The taxpayer’s employment terminated and a settlement sum of $XXX as stipulated under the Deed was to be paid.

20. As the settlement sum was paid within 12 months of termination, paragraph 82-130(1)(b) of the ITAA 1997 is satisfied.

Exclusions under section 82-135 of the ITAA 1997

21. Section 82-135 of the ITAA 1997 provides that certain payments are not employer termination payments. This includes (among others):

● unused annual leave and unused long service leave payments; and

● 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 (within the meaning of the definition of income derived from personal exertion in subsection 6(1) of the Income Tax Assessment Act 1936).

22. In this case, the settlement sum is not a payment that falls within any of the exceptions in section 82-135.

23. Therefore, the settlement sum of $XXX paid by the Employer in settlement of litigation proceedings is an employment termination payment in accordance with section 82-130 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

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

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

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1936 Subsection 6(1)

Fair Work Act 2009 Section 539

Fair Work Act 2009 Section 546