Edited version of private advice

Authorisation Number: 1051586499328

Date of advice: 20 December 2019

Ruling

Subject: Lump sum payment

Question

Is any part of the payment you received assessable as an employment termination payment in accordance with section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You commenced your employment with the employer in November 20XX.

During your employment you were offered a contract to work with employer. In addition to this, you also filled in at the main centre when people were sick or on annual leave.

Around early 20XX, you first experienced a pain in your lower back when you were working. As a result of seeing your general practitioner, you had a short period off work and within a few months, your symptoms had mostly resolved and you returned to work.

However, you continued to have issues with you back as a result of your work. Your back issues resulted in you taking extended periods of time off from work.

You have sought out various general practitioners for assistance in relation to your back pains and they have referred you onto other medical professionals.

On January 20XX the employer terminated your employment, you advised us that your termination from your employment was as a result of you being unable to do % of the job as a result of your back issues.

On October 20XX, your lawyers entered into a Settlement Authority with the employer on your behalf. As a result of this, the employer owed you a sum of $ for pain and suffering damages relating to the injuries you suffered at the employer.

As part of the Settlement Authority, you authorised your lawyers to receive their professional costs directly from the employer and deduct monies amounting to $ to pay for solicitor/client costs.

On October 20XX, the employer deposited a lump sum amount into your bank account net of solicitor/client costs.

You stated to us over the phone that the lump sum amount you received did not include any of the payment types covered under section 82-135 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-10.

Income Tax Assessment Act 1997 Subsection 82-10(1).

Income Tax Assessment Act 1997 Subsection 82-10(2).

Income Tax Assessment Act 1997 Subsection 82-10(3).

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 Paragraph 82-130(1)(c).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Paragraph 82-135(i).

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 Subsection 82-150(1).

Income Tax Assessment Act 1997 Subsection 82-150(2).

Reasons for decision

Summary

The lump sum payment which you received is considered to be an employment termination payment (ETP) under section 82-130 of the ITAA 1997.

However, the lump sum which is considered to be an ETP would be reduced if it included any amounts relating to payments, benefits or reimbursements for personal injury.

To the extent that the lump sum consists of a tax free component, it is not assessable income and is not exempt income.

The total amount is a taxable component of an ETP and is to be included in your income tax return for the 20XX-XX income year.

Detailed reasoning

Employment termination payment

For the lump sum payment you received to be considered an employment termination payment (ETP), the payment must satisfy the definition of an ETP set out in subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

Subsection 82-130(1) of the ITAA 1997 states that 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 termination (except for situations mentioned in 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 the present case, the lump sum you received relates to the injuries you suffered during your employment which led to your employer terminating your employment.

Although your injuries were the dominant cause of the lump sum payment, a connection exists between the termination of your employment and the receipt of the lump sum payment. This is because your injuries led to you being terminated from your employment.

Consequently, the payment of the lump sum is 'in consequence of' the termination of your employment.

The 12 month rule set out in paragraph 82 130(1)(b) of the ITAA 1997

Paragraph 82 130(1)(b) of the ITAA 1997 specifies that the payment must be received within 12 months of the employee's termination of employment, unless they are covered by a determination exempting them from the '12 month rule'.

As per the facts of this case, you were terminated from your employment on X January 20XX and received the lump sum from your employer on X October 20XX.

As the period of time between your termination and the receipt of the lump sum was less than 12 months, the lump sum payment satisfies the 12-month rule.

Type of payment not mentioned in 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 lists certain payments that are not ETPs.

As per the facts of this case, the lump sum amount you received did not include any payment types which are listed in section 82-135 of the ITAA 1997.

However, based on the injuries you suffered during your employment with the Group, a portion of the lump sum payment you received may contain a capital payment in respect of a personal injury as per paragraph 82-135(i) of the ITAA 1997.

Paragraph 82-135(i) of the ITAA 1997 states that an employment termination payment does 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.

Hence, if any part of lump sum you received consists of payments, benefits or reimbursements for personal injury, the amounts relating to such payments are not considered to be ETPs.

Application of section 82-130 of the ITAA 1997 to the payment that you have received

Based on the above criteria, the lump sum is consider to be an ETP as it satisfies the definition of an ETP under section 82-130 of the ITAA 1997.

However, if the lump sum contained amounts associated with any payments, benefits or reimbursements for personal injury, the part of the lump sum which is considered to be an ETP is reduced.

Taxation of employment termination payments

An ETP made may be comprised of the following components:

§  the tax fee component; and

§  the taxable component

Subsection 82-10(1) of the ITAA 1997, states that the 'tax free component' of a life benefit termination payment is not assessable income and is not exempt income.

Tax free component is defined in section 82-140 of the ITAA 1997 as so much of the ETP as consists of the following:

(a)  the invalidity segment of the payment with the meaning of section 82-150 of the ITAA 1997;

(b)  the pre-July 83 segment of the payment within the meaning of section 82-155 of the ITAA 1997.

Based on the information you have provided, the ETP portion of lump sum you received may have an invalidity segment under section 82-150 of the ITAA 1997.

Subsection 82-150(1) of the ITAA 1997 states that:

An employment termination payment includes an invalidity segment if:

(a) the payment was made to a person because he or she stops being gainfully employed*; and

(b) the person stopped being gainfully employed because he or she suffered from ill-health (whether physical or mental); and

(c) the gainful employment stopped before the person's last retirement day*; and

(d) 2 legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the person can ever be gainfully employed in capacity for which he or she is reasonably qualified because of education, experience or training.

*the definitions of the terms 'gainfully employed' and 'last retirement day' can be found under subsection 995-1(1) of the ITAA 1997.

In your case, if the ETP portion of the lump sum you received satisfies all the conditions stated above, it will contain an invalidity segment. The amount of this segment can be worked out by using the formula prescribed under subsection 82-150(2) of the ITAA 1997.

However, if the lump sum you received does not satisfy the conditions outlined in subsection 82-150(1), the ETP portion of your lump sum will not include any tax free components.

Taxable component

Pursuant to section 82-10(2) of the ITAA 1997, the taxable component of a life benefit ETP is assessable income.

In accordance with section 82-145 of the ITAA 1997, the taxable component of an ETP is the amount remaining after deducting the tax free component from the total payment.

For recipients below preservation age, the taxable component of an ETP is taxed at 30% for amounts below the ETP cap amount ($200,000 for the 2017-18 income year), and at the top marginal rate for amounts above the cap (subsection 82-10(3) of the ITAA 1997).