Edited version of private advice

Authorisation Number: 1051592838695

Date of advice: 10 October 2019

Ruling

Subject: Employment termination payment

Question

Is the lump sum payment (the Settlement Sum), paid to you by the Former Employerunder the terms of the Settlement Deed an employment termination payment under section 82-130 of the Income Tax Assessment Act 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 employment with the Former Employer during the 2018-19 income year.

During the 2018-19 income year, your employment was terminated.

Shortly after your termination, you filed an application (the Application) with the Fair Work Commission alleging unfair dismissal.

You and the Former Employer subsequently agreed to settle all matters and potential claims in relation to the termination and entered into a Settlement Deed.

The Former Employer made a payment of $X (the Settlement Sum) to you in the 2018-19 income year

The Former Employer treated the payment as wages and not as an employment termination payment (ETP).

Relevant legislative provisions

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 995-1(1)

Reasons for decision

Summary

The lump sum payment of $X (the Settlement Sum) paid by the Former Employer to you is an employment termination payment and is included in your assessable income for the 2018-19 income year.

The amount up to the ETP cap amount is subject to tax at a concessional rate.

Detailed reasoning

Employment termination payments

By virtue of subsection 995-1(1) of the Income Tax Assessment Act 1997 (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.

Section 82-135 provides that certain payments are not employer termination payments. These include (among others):

·                     superannuation benefits

·                     unused annual leave or long service leave payments

·                     foreign termination payments covered under Subdivision 83-D and

·                     the tax-free part of a genuine redundancy payment or an early retirement scheme payment.

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 the courts 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 eligible termination payments, TR 2003/13 can still be relied upon 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 received by a taxpayer in consequence of the termination of the taxpayer's employment 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 received by 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, you were dismissed from employment with the Former Employer in the 2018-19 income year. As a result of the dismissal, you filed the Application which lead to the settlement, as a result of which, you received the Settlement Sum of $X.

Hence, it is our view that the Settlement Sum was received by you in consequence of the termination of your employment with the Former Employer because there is a sequence of events following the termination which has a relationship and connection which ultimately leads to the payment. That is, the payment is a consequence of the settlement, which is a consequence of the Application, which in turn is a consequence of the termination of your employment.

Therefore, it is considered that the Settlement Sum was received by you in consequence of the termination of your employment with the Former Employer as required by subparagraph 82-130(1)(a)(i) of the ITAA 1997.

The Settlement Sum was received by the you within 12 months after the termination of your employment as required by paragraph 82-130(1)(b) of the ITAA 1997.

Finally, section 82-135 of the ITAA 1997 lists payments that are not ETPs, none of which applies in this case.

Therefore, the Settlement Sum you received from the Former Employer is an ETP for the purposes of section 82-130 of the ITAA 1997.