Edited version of private advice

Authorisation Number: 1051583162651

Date of advice: 20 September 2019

Ruling

Subject: Employment termination payments

Question

Is the sum paid to a person (Your Client) by an entity (the Employer) an employment termination payment (ETP) for the purposes of Division 82 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Income year ending 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

Your Client was employed by the Employer.

In 2019, a dispute arose between Your Client and the Employer.

The Employer advised that grave misconduct or wilful neglect in the discharge of Your Client's duties had been established under their employment agreement and therefore Your Client's employment would be terminated.

The dispute was settled on the terms of the Deed of Release (the Deed) which provides, in part, that:

(a)   The Employer will pay Your Client a lump sum.

(b)   Your Client releases and discharges the Employer from all claims, debts and liabilities of any nature which Your Client may, at any time, have, or incur, against the Employer in connection with, or arising out of, the employment or termination of Your Client and employment agreement apart from any claim for worker's compensation.

Your Client has received the lump sum payment.

Relevant legislative provisions

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.

Reasons for decision

Summary

The lump sum payment made by the Employer to Your Client is an ETP for the purposes of Division 82 of the ITAA 1997.

Detailed reasoning

Division 82 of the ITAA 1997 sets out how ETP are treated for income tax purposes.

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 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, Your Client was to terminate their employment on a specified date. Within five days of the termination, upon receipt of a duly executed copy of the Deed the Employer is to pay Your Client the lump sum.

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

Consequently, the payment 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

Your Client received the payment within 12 months of the termination. Therefore, this condition is satisfied.

Exclusions under section 82-135 of the ITAA 1997

The condition specified in paragraph 82-130(1)(c) of the ITAA 1997 is that an employment termination payment does not include a payment mentioned in section 82-135 of the ITAA 1997.

Section 82-135 of the ITAA 1997 includes payments such as pensions, foreign termination payments, unused annual leave and unused long service leave and the tax free part of genuine redundancy payments or early retirement scheme payments, as well as other types of payments which are not considered to be employment termination payments.

The payment is not a payment mentioned in section 82-135 of the ITAA 1997.

Conclusion

Therefore, the payment is an ETP pursuant to section 82-130 of the ITAA 1997.