Edited version of private advice

Authorisation Number: 1051669817991

Date of advice: 12 October 2020

Ruling

Subject: Employment termination payment and personal injuries

Question

Is the ex-gratia settlement payment made by your employer an employment termination payment in accordance with section82-130 of the Income Tax Assessment Act1997 (ITAA1997)?

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

You were employed as a permanent full-time Office Manager.

You have disputes with your employer about incidents during your employment, these incidents involved verbal abuse, callouts and offensive comments, and sexual harassment and victimisation by your employer and the manager of your employer company.

You requested a settlement payment from your Employer.

You signed a Deed of Settlement and Release with your Employer.

Without any admission of liability, the Parties agreed to settle the matter and the claim on the terms set out in the Deed.

The Deed terms required your resignation from employment with the Employer in exchange for a settlement payment.

The Deed releases both you and he Employer from all complaints, claims, rights or entitlements (whether in contract, statute, common law or at all) relating to your employment or resignation from employment with the Employer.

Under the Deed of Settlement, your employer will pay you:

-   an ex-gratia payment:

-   salary in lieu of notice; and

-   payment of all outstanding accrued contractual entitlements.

Your employment came to an end with your resignation as per the terms of the Deed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-135

Reasons for decision

A payment is an ETP if the payment satisfies all the requirements in section 82-130 of the ITAA 1997 and is not specifically excluded under section 82-135.

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 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 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.

The facts need to show there is a direct causal connection between the payment and a termination of employment. If a termination of employment does not occur, then an employee is not entitled to the payment.

In this case, you were paid xx weeks of ex-gratia payment because you agreed to resign and settle with your employer. If you did not terminate your employment, you would not have been paid this ex-gratia payment. This payment you received is considered it is made in consequence of termination of employment.

Payment received no later than 12 months after termination

You resigned on DD MM YYYY and received your payment of xx weeks salary on DD MM YYYY. The payment was made within 12 months after termination.

Not a payment mentioned in section 82-135 of the ITAA 1997

Paragraph 82-130(1)(c) of the ITAA 1997 specifies that an ETP does not include a payment mentioned in section 82-135 of the ITAA 1997. An exclusion under paragraph 82-135(i) of the ITAA 1997 includes a capital payment for personal injury as compensation for your inability to be employed.

In Re Luke and Federal Commissioner of Taxation [2011] AATA 801; (2011) 2011 ATC 10-216; the Administrative Appeals Tribunal (AAT) accepted that the taxpayer had been adversely affected by what they perceived to be unreasonable harassment and discrimination in their employment, but said that 'personal injury' does not extend 'beyond physical injury and mental illness to include emotional hurt'. The AAT added that:

Evidence is required that the payment had some form of identifiable and unambiguous connection with a personal injury, for which compensation was necessary as a reflection of the fact that the applicant's capacity to derive income from personal exertion had been impaired.

In view of the above, a physical and/or mental injury would require diagnosis by a qualified medical practitioner to fall within the meaning of 'personal injury'. The payment must also be calculated by reference to the nature of the injury and the extent to which the injury will affect your capacity to derive income from employment.

Although the settlement payment (received for the execution of the Deed and for not pursuing your Employer) relates to your claim for a psychological injury, the Employer has denied any liability to the allegations and you have released them from all claims relating to the matter. The Deed does not provide any medical qualification or clarification that the payment was calculated with regard to your likely loss of income producing capacity.

Therefore, in accordance with paragraph 82-130(1)(c) of the ITAA 1997, the payment is not for, or in respect of, personal injury which would be is excluded from being an ETP under section 82-135.

Consequently, the ex-gratia payment will be included in your assessable income under section subsection 82-130(1) of the ITAA 1997.