Edited version of your written advice

Authorisation Number: 1051453722358

Date of advice: 20 November 2018

Ruling

Subject: Employment termination payments

Question

Is an amount paid to a person (the Taxpayer) by their former employer (the Employer) an employment termination payment (ETP) for the purposes of section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer commenced employment with the Employer more than 10 years ago. .

In the 20XX-XX income year, the Employer terminated the Taxpayer’s employment.

Subsequently, through a representative of their trade union (the Union), the Taxpayer made a number of demands of the Employer in relation to the termination of their employment.

A week after the termination, the Employer was notified of a claim lodged by the Taxpayer in a state Equal Opportunity and Human Rights Commission alleging unlawful discrimination by the Employer (the Claim).

Several days later, with neither party admitting liability in any regard whatsoever, the Taxpayer and the Employer agreed to settle the Claim under the terms of the Settlement and Release Agreement (the Agreement) on the basis that:

● In consideration of the terms of the Agreement, and subject to the Taxpayer returning an executed copy of the Agreement to the Employer within a few days, the Employer will pay to the Taxpayer a specified gross amount (the Settlement Sum).

● Tax which the Employer is required to withhold will be deducted from the Settlement Sum.

● The payment will be made by the Employer within seven days of receiving an executed copy of the Agreement.

● Within 48 hours of receiving the payment, the Taxpayer will discontinue the Claim.

As agreed, the Taxpayer received the Settlement Sum less an amount the Employer withheld for taxation purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130.

Income Tax Assessment Act 1997 section 82-135.

Reasons for decision

Summary

The Settlement Sum paid by the Employer to the Taxpayer is an employment termination payment (ETP) for the purposes of section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Employment termination payments

In accordance with section 82-130 of the ITAA 1997, a payment is 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.

In consequence of termination of employment

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 5 and 6 of TR 2003/13 the Commissioner states:

5.... 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. The question of whether a payment is received in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

Payments made to a taxpayer as a result of settlement of a claim arising out of the termination of the taxpayer’s employment, are specifically addressed in TR 2003/13. According to paragraph 31 of TR 2003/13 which states:

31….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 this case, the Settlement Sum was paid to the Taxpayer to settle the Claim brought by them as a result of the termination of their employment. As such, there is sufficient connection between the termination of the Taxpayer’s employment and the payment to them of the Settlement Sum. That is, but for the termination of the Taxpayer’s employment, the Settlement Sum would not have been paid to them.

Consequently, the payment of the Settlement Sum is ‘in consequence of’ the termination of the Taxpayer’s employment with the Employer.

Payment is received no later than 12 months after termination

The Taxpayer’s employment was terminated in the 20XX-XX income year. The Settlement Sum was, in accordance with the Agreement, to be paid by the Employer within seven days of the Agreement being executed which is less than 12 months after the termination. Consequently, this condition has been satisfied.

Additionally, the payment of the Settlement Sum is not a payment mentioned in section 82-135 of the ITAA 1997. Therefore, the Settlement Sum is an ETP pursuant to section 82-130 of the ITAA 1997.