Edited version of your written advice

Authorisation Number: 1051464526640

Date of advice: 13 December 2018

Ruling

Subject: Compensation Payment – settlement – employment termination payment

Question 1

Is the Settlement Sum excluded totally for income tax purposes?

Answer

No.

Question 2

Is the Settlement Sum an employment termination payment (ETP)?

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

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.

The Taxpayer commenced work as an employee with the Employer in late 20XX.

The Taxpayer lodged a complaint with the Employer alleging workplace harassment and bullying by another employee.

The Taxpayer contacted Workplace Health and Safety XX requesting advice about lodging a complaint for workplace harassment and bullying.

The Taxpayer resigned from their employment.

The Taxpayer and the Employer entered into an Agreement (the Agreement) to settle the matter. The Agreement provides, in part, that:

(a) The Employer will pay you the sum of $X (the Settlement Sum) in full settlement of your entitlements and claims, and

(b) In consideration of the Settlement Sum payment, you release and discharge the Employer from any liability, past present or future, from all claims, suits, demands, actions or proceedings arising out of or connected with your employment with the Employer but not limited to the cessation of employment.

The Settlement Sum was received within 12 months of resignation.

The Taxpayer’s position was subsequently filled by the Employer.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 Division 82

Income Tax Assessment Act 1997 section 82-10

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 section 82-140

Income Tax Assessment Act 1997 section 82-145

Income Tax Assessment Act 1997 section 82-150

Income Tax Assessment Act 1997 section 82-155

Reasons for decision

Summary

The Settlement Sum paid by the employer to the Taxpayer is an Employment Termination Payment (ETP) for the purposes of Division 82 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Ordinary Income

Your assessable income includes income according to ordinary concepts, which is called ordinary income (section 6-5 of the ITAA 1997). Ordinary income has generally been held to include 3 categories, namely, income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that:

● are earned

● are expected

● are relied upon, and

● have an element of periodicity, recurrence or regularity.

Compensation receipts which substitute for income have been held by the courts to be ordinary income; whereas, compensation paid for the loss of a capital asset or amount is regarded as a capital receipt and not ordinary income and is potentially taxable as statutory income.

In your case, the payment is not being made to compensate you for the loss of earnings; rather it is a one-off, lump sum amount, being paid to settle your employment dispute. The payment was not earned and does not have any element of periodicity, recurrence or regularity.

As such, the Settlement Sum is not ordinary income and is therefore not included in your assessable income under section 6-5 of the ITAA 1997.

Statutory income

Statutory income is not ordinary income, but is included in assessable income by specific provisions of the income tax law (section 6-10 of the ITAA 1997).

The specific provisions are listed in section 10-5 of the ITAA 1997 and include ETPs, which are included in assessable income under Division 82 of the ITAA 1997.

Employment termination payments

Division 82 of the ITAA 1997 sets out how ETPs are treated for income tax purposes. In accordance with section 82-130 of the ITAA 1997, a payment is an 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 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 received in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In this instance, the Settlement Sum was paid after the Taxpayer had terminated their employment. Relevantly, the Agreement states that the Taxpayer has received the Settlement Sum as consideration for releasing and discharging the Employer from all claims, suits, demands, actions or proceedings and employee entitlements arising out of or connection with the Taxpayer’s employment and the cessation of their employment.

The dominant cause of the Settlement Sum was in response to the allegations made by the Taxpayer that led to their resignation. Therefore, there is a causal connection between the termination of employment and the payment.

Payment is received no later than 12 months after termination

The Taxpayer’s employment was terminated on early 20XX and the payment was made on early 201X. This is less than 12 months after the termination of the Taxpayer’s employment.

Additionally, the payment 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.

Application to your circumstances

Based on the Commissioner's views expressed in TR 2003/13, there is, in this case, a clear connection between the termination of the Taxpayer’s employment and the payment of the Settlement Sum. That is, but for the termination, the Settlement Sum would not be paid to the Taxpayer.

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