| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1051459619494
Date of advice: 7 January 2019
Ruling
Subject: Permanent and disability lump sum payment - employment termination payment.
Question 1
Will the portion of the ex-gratia payment that is in relation to your termination of employment be exempt from being an eligible termination payment (ETP) under section 82-135 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes
Question 2
Will the portion of the ex-gratia payment that is in relation to your personal injury be exempt from being an ETP under section 82-135 of the ITAA 1997?
Answer
No
Question 3
Will the portion of the ex-gratia payment that is in relation to your personal injury be exempt under 118-37(1)(a) of the ITAA 1997?
Answer
Yes
This ruling applies for the following periods:
1 July 2018 to 30 June 2019
The scheme commences on:
1 July 2018
Relevant facts and circumstances
While you were employed you lodged a claim for compensation for loss of wages and work related injury under the Return to Work Act 2014 for an injury you allegedly sustained at work.
In the same month you lodged a further claim for compensation for loss of wages and work related injury under the Return to Work Act 2014.
Your employer issued a determination to reject the claim for compensation and further claim for compensation pursuant to sections 31(7) and (8) of the Return to Work Act 2014 on the basis that the part of the injury did not arise from your employment.
You lodged an application for review in the state Employment Tribunal in relation to the rejection of the workers compensation proceedings.
By mutual agreement between your employer and yourself your employment was terminated, all matters were settled in relation to the claim for compensation and/or the workers compensation proceedings in accordance with the terms of the deed of release.
The deed states your employer agrees to make an ex gratia payment of a significant amount to you including but not limited to compensation for permanent disability impairing your future earning capacity in relation to disabilities arising from the injury, within a stipulated timeframe of receipt of the deed, less any such amount of income tax as may be required by the provisions of the Income Tax Assessment Act for an eligible termination payment.
The proposed deed of release is not finalised and is still being mediated on the breakdown of the payment. You have put the settlement on hold while you receive advice.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 subsection 6-5(2)
Income Tax Assessment Act 1997 section 6-10
Income Tax Assessment Act 1997 section 102-5
Income Tax Assessment Act 1997 paragraph 118-37(1)(b)
Reasons for decision
Employment Termination Payment
According to subsection 82-130(1) of the ITAA 1997:
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 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:
● a superannuation benefit
● unused annual leave or unused long service leave payments
● the tax free part of a genuine redundancy payment or an early retirement scheme payment and
● a capital payment in respect of a personal injury to you is reasonable.
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) of the ITAA 1997 will result in the payment not being treated as an ETP.
Summary
In your case the portion of the ex-gratia payment that is an eligible termination payment may satisfy the requirements of subsection 82-130(1) of the ITAA 1997. For this to apply it must be received within 12 months of termination (unless the Commissioner determines this does not apply to you). The portion of the payment that is an ETP will be taxable in the year it is received except for any parts that are mentioned in section 82-135 of the ITAA 1997. As a capital payment in respect of a personal injury to you is mentioned in section 82-135 of the ITAA 1997, the portion of the ex-gratia payment that is in relation to your personal injury will be exempt from being an ETP.
Capital gains tax (CGT)
Amounts received in respect of personal injury which are not direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the CGT provisions of the ITAA 1997.
Receipt of a lump sum payment may give rise to a capital gain (statutory income). However, subparagraph 118-37(1)(a)(ii) of the ITAA 1997 entitles a taxpayer to disregard any capital gain or loss made from a capital gains tax event relating directly to compensation or damages received for any injury, illness or wrong the taxpayer suffers personally.
Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation and may result in a capital gain. Paragraph 19 of TR 95/35 provides the following:
Compensation received by an individual for any wrong or injury suffered to his or her person or in his or her profession or vocation is exempt from CGT under subsection 160ZB(1).
Subsection 160ZB(1) of the Income Tax Assessment Act 1936 was repealed and replaced by section 118-37 of the ITAA 1997.
When settling with a lump sum payment you surrender your rights, not only to recover any such benefits in the action, but also to claim any further benefits to which you might now or in the future have an entitlement to.
Summary
The portion of the ex-gratia payment that relates to your injury will be disregarded. Applying subparagraph 118-37(1)(a)(ii) of the ITAA 1997 to your circumstances, the portion of the ex-gratia lump sum payment for permanent injury would not be considered as an assessable capital gain.