Edited version of private advice

Authorisation Number: 1051897390136

Date of advice: 20 September 2021

Ruling

Subject: Employment termination payment

Question 1

Is the settlement amount representing several months' pay in lieu of notice, paid to you by your former employer under a deed of release, an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is the settlement amount representing unused annual leave, paid to you by your former employer under a deed of release, an employment termination payment under section 82-130 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You commenced employment with your former employer several years ago.

You were employed on a full-time basis on a fixed term contract.

Your former employer suspended your employment on full pay pending investigation of certain allegations.

Shortly after your suspension you commenced proceedings in the Fair Work Commission against your former employer for alleged contraventions of the Fair Work Act 2009.

As a result of negotiations, you entered into a Deed of Release (the Deed) which stipulated that your employment would cease on a particular date, and that you have agree to finalise all claims as per the terms of the Deed.

Further, as per the terms of the Deed your former employer would pay you a settlement sum, representing several months' pay in lieu of notice and unused annual leave.

You received the settlement sum in the 20XX-XX income year.

You filed a separate workers compensation claim against your former employer.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

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 Subsection 83-10(2)

Reasons for decision

Summary

The settlement amount for pay in lieu of notice, paid to you by your former employer under a deed of release, is an employment termination payment and is included in your assessable income for the 2020-21 income year.

The settlement amount representing unused annual leave, paid to you by your former employer under a deed of release, whilst not an employment termination payment, is also assessable income and included in your assessable income for the 20XX-XX income year.

Detailed reasoning

A person's assessable income consists of ordinary income and statutory income. An amount is statutory income if it is not ordinary income and is included in assessable income by a provision of the Income Tax Assessment Act 1936 or the ITAA 1997.

Employment termination payment

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

Subsection 82-130(1) of the ITAA 1997 states:

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 the termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

Section 82-135 of the ITAA 1997 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.

Lump sum payment for pay in lieu of notice

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) sets out the Commissioner's views on when a payment is made 'in consequence of' termination of employment. Paragraphs 5 and 6 of TR 2003/13 state:

5. the Commissioner considers that 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.

As outlined in the facts and as per the terms of the Deed, the settlement amount paid represented payment for several months' pay in lieu of notice, and was paid to you in full and final settlement of all claims (except for any workers compensation claims or rights) against your former employer in the Fair Work Commission, with no admission of liability. The payment was not made to you for any specific personal injury suffered during employment. This is further supported by the separate claim you since lodged for workers compensation against your former employer.

The settlement amount as clearly stipulated, is a payment representing pay in lieu of notice. Further, as per the Deed, you agreeing to your employment ceasing on a particular date was a pre-requisite to payment of the settlement amount.

The payment was therefore made 'in consequence of' the termination of your employment. There is a causal connection between your termination and the payment. In other words, but for the termination of your employment, this payment would not have been made to you.

Therefore, the payment was made in consequence of the termination of employment as defined in subparagraph 82-130(1)(a)(i) of the ITAA 1997.

This amount was paid to you within 12 months of your termination, thereby satisfying paragraph 82-130(1)(b) of the ITAA 1997.

Further, as previously mentioned, there is no evidence to show that the payment is specifically excluded under section 82-135 of the ITAA 1997 (thereby satisfying paragraph 82-130(1)(c)).

Accordingly, the lump sum amount paid to you by your former employer is an employment termination payment under section 82-130 of the ITAA 1997 and is included in your assessable income in the 2020-21 income year.

Lump sum payment for accrued annual leave

Unused annual leave and long service leave payments are specifically excluded from being employment termination payments under section 82-135 of the ITAA 1997. Consequently, the settlement sum received representing unused annual leave is not an employment termination payment.

Unused annual leave payments are included in your assessable income in accordance with subsection 83-10(2) of the ITAA 1997.