Edited version of private advice

Authorisation Number: 1051535291225

Date of advice: 1 July 2019

Ruling

Subject: Termination of employment

Question

Does the payment received by your client on separation from the employer constitute an employment termination payment under section 995-1(1) and section 82-130 Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question

Should the taxable component of the employment termination payment received by your client be excluded from the whole-of-income cap under paragraph 82-10(6)(d) of the ITAA 1997?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

Your client was employed by the Employer.

Following a dispute, your client was stood aside on suspended pay without notice.

Your client lodged a complaint with the Fair Work Commission (the Application) regarding the dispute and the circumstances surrounding their suspension.

As a result of the Application, the Employer elected to settle the dispute (the Settlement) via the terms outlined in the Deed of Separation (the Deed).

The Deed states, at Paragraph C:

C Without admission of liability, (the parties) have agreed to resolve the matters the subject of the Dispute, (your client's) employment with (the Employer) and related matters, on the basis described in this Deed, and to record in this Deed the agreed arrangements for (your client's) separation from (the Employer).

The Deed further states, at Paragraphs 2 and 3:

2.1 By signing this Deed, (your client) agrees to discontinue the Dispute and also agreed to the arrangements in clause 2.2 of this Deed in order to give effect to this.

...

3.1 By signing this deed, (your client) separates from employment with (the Employer) with effect on the Separation Date.

Your client received separation pay (the Payment), in addition to annual leave, long service leave, and the reimbursement of legal expenses. This amount was higher than what would have been otherwise expected under termination of similar employment and ordinary termination conditions.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-85 of Schedule 1

Income Tax Assessment Act 1997 Section 82-10

Income Tax Assessment Act 1997 Section 82-130

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

Income Tax Assessment Act 1997 Subparagraph 82-130(1)(a)(i)

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

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Subsection 955-1(1)

Reasons for decision

Summary

The Payment paid by the Employer to your client is an employment termination payment for the purposes of section 12-85 of Schedule 1 of the TAA.

The Payment was not received by your client as principally compensation for harassment or unfair dismissal. Therefore, the whole-of-income cap applies to the payment.

Detailed reasoning

Question 1

By virtue of subsection 995-1(1) of ITAA 1997, employment termination payments are defined in subsection 82-130(1) of the ITAA 1997, which states that a payment is an employment termination payment (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.

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) will result in the payment not being treated as an ETP.

Paid 'in consequence of' the 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. Taking into account court decisions on the meaning of the 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 considered the meaning of the phrase 'in consequence of' in the context of the eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 (ITAA 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 made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In the present case, your client terminated employment with the Employer following on from a dispute with the Employer.

Your client states that prior to the termination of employment your client had suffered from various adverse actions from the Employer. As a result your client filed the Application to the Fair Work Commission which led to the Settlement. As part of the Settlement your client received, inter alia, the Payment.

It is acknowledged that a claim for wrongs or injuries suffered by your client was generally the subject of the Application. It is also accepted that these matters may have primarily occurred prior to the termination of employment.

However, it is considered that the Payment was received by your client in consequence of the termination of employment as the sequence of events preceding the termination ultimately lead to the Payment. That is, there is a causal nexus between the Payment and the termination of employment. As stated by the Commissioner in paragraph 6 of TR 2003/13, the termination need not be the dominant cause of the payment.

Therefore, it is considered that the Payment received by your client was in consequence of the termination of employment with the Employer; hence, subparagraph 82-130(1)(a)(i) of the ITAA 199 is satisfied.

The Payment was received by your client within 12 months after the termination of employment. Accordingly, paragraph 82-130(1)(b) of the ITAA 1997 was satisfied

Subsection 82-135(i) of the ITAA 1997 - Payments that are not ETPs

Section 82-135 of the ITAA 1997 lists certain payments that are not ETPs.

Relevantly, subsection 82-135(i) states that ETPs do not include:

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);...

Payments that fall within this exclusion are payments or benefits that compensate or reimburse the person for, or in respect of, the particular injury.

It is considered that the Payment was paid in order to resolve the dispute with the Employer rather than for personal injury suffered by your client. Accordingly, the Payment is not a payment mentioned under section 82-135 of the ITAA 1997 and is not specifically excluded from being an ETP.

Conclusion

The Payment your client received from the Employer is an ETP as it satisfies the relevant conditions in subsection 82-130(1) of the ITAA 1997.

Question 2

Whole-of-income cap

ETPs may be subject to a whole-of-income cap of $180,000 which is not indexed. Any part of an employment termination payment that exceeds the whole-of-income cap will be taxed at the highest marginal tax rate (plus Medicare levy).

Taxation of an employment termination payment

Subsection 82-10(4) of the ITAA 1997 states that:

The following is so much of the taxable component of the payment as does not exceed the smallest of the following:

(a) the ETP cap amount reduced (but not below zero) by:

(a)          (i) if the payment is a kind referred to in subsection (6) (an excluded payment) - the amount worked out under this subsection for each life benefit termination payment you have received earlier in the income year to the extent that it is excluded payment; or

(b)          (ii) if the payment is not an excluded payment - the amount worked out under this subsection for each life benefit termination payment you have received earlier in the income year;

(b) the ETP cap amount reduced (but not below zero) by:

(c)          (i) if the payment is an excluded payment - the amount worked out under this subsection for each life benefit termination payment you have received earlier in consequence of the same employment termination (whether in the income year or an earlier income year) to the extent that it is an excluded payment; or

(d)          (ii) if the payment is not an excluded payment - the amount worked out under this subsection for each life benefit termination payment you have received earlier in consequence of the same employment termination (whether in the income year or an earlier income year);

(c) if the payment is not an excluded payment - $180,000, reduced (but not below zero) by your taxable income for the income year in which the payment is made.

Further, subsection 82-10(5) of the ITAA 1997 provides that for the purposes of paragraph 82-10(4)(c)of the ITAA 1997, a person's taxable income for the income year will disregard:

(a) the taxable component of the payment; and

(b) the taxable component of each life benefit termination payment you receive later in the income year.

However, subsection 82-10(6) of the ITAA 1997 provides that paragraph 82-10(4)(c) does not apply in relation to life benefit termination payments:

(a) that are genuine redundancy payments, or that would be genuine redundancy payments but for paragraph 83-175(2)(a); or

(b) that are *early retirement scheme payments; or

(c) that include *invalidity segments, or what would be invalidity segments included in such payments but for paragraph 82-150(1)(c); or

(d) that:

(i) are paid in connection with a genuine dispute; and

(ii) are principally compensation for personal injury, unfair dismissal, harassment, discrimination or a matter prescribed by the regulations; and

(iii) exceed the amount that could, at the time of the termination of your employment, reasonably be expected to be received by you in consequence of the voluntary termination of your employment.

As such the whole of income cap operates to remove the tax offset in respect of employment termination payments for individuals whose taxable income exceed $180,000. It does this by:

Step 1: deducting a person's taxable income from the year, other than the taxable component of any employment termination payment received, from $180,000;

Step 2: calculating the person's ETP cap amount; and

Step 3: comparing the result in Step 1 with the result in Step 2. The offset allowable is calculated on the lesser of these two amounts, but is not less than zero.

Consequently, any amount of a taxable component of an employment termination payment that takes a person's taxable income over $180,000 will be taxed at marginal rates.

Payments excluded from the whole-of-income cap

To determine if an employment termination payment is excluded from the whole-of-income cap, subsection 82-10(6) of the ITAA 1997 must be satisfied. Failure to satisfy at least one of the conditions listed under this subsection will prevent the payment from being excluded under the whole-of-income cap.

Paid in connection with a genuine dispute

Your client contends that the conduct of the Employer in the period preceding the Application amounted to harassment on the part of the Employer.

By submitting the Application, your client has shown that there was a genuine dispute with the Employer which gave rise to the Payment.

This condition is therefore satisfied.

Principally compensation for harassment or unfair dismissal

Your client has contended that was subject to adverse actions from the Employer which amounted to harassment. Your client's specific claims are outlined in the Application which was made to Fair Work Australia. Your client further contends that the circumstances of their departure constitute unfair dismissal on the part of the Employer.

While the dispute lodged with Fair Work Australia may eventually have resulted in an adverse finding against the Employer (i.e. that harassment and/or unfair dismissal occurred), and the Employer may have been obliged to pay an amount in compensation, the parties instead chose to resolve the dispute through execution of the Deed.

We accept that your client's allegations of harassment form the subject of the dispute; however the Deed does not establish that the Payment was made principally as compensation for harassment or unfair dismissal. There is no indication that the amount of the Payment was calculated in reference to any specific loss or harm suffered by your client. Rather, the Deed specifies, at Paragraph C, that the Payment is made in order to settle the dispute and resolve all claims.

Similarly, by entering into the Deed, your client has in fact agreed to the terms relating to the termination of employment and cannot be said to have been unfairly dismissed.

Accordingly, this condition has not been satisfied.

Exceeds amount on voluntary termination

Under the terms of your client's employment agreement, it is unlikely your client would have received the Payment if your client voluntarily terminated employment. Therefore, this condition is satisfied.

Conclusion

As the payment does not meet all of conditions under subsection 82-10(6) of the ITAA 1997, it cannot be excluded from the whole-of-income cap. Therefore, the whole of income cap will apply to the payment.