Edited version of private advice

Authorisation Number: 1051929330662

Date of advice: 18 February 2022

Ruling

Subject: Employment termination payment - settlement

Question 1

Is the ex-gratia payment for contribution towards the costs of future medical treatment considered to be an employment termination payment (ETP) as defined in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes

Question 2

Is the ex-gratia payment for future retraining assessable as a ETP as defined in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 2

Yes

Relevant facts and circumstances

You entered into a Release and Discharge Agreement (Agreement). The Agreement is between the youyou're your former Employer.

The Agreement provides:

Recitals

A. Taxpayer is employed by Employer

B. Taxpayer has submitted a claim for compensation alleging that they suffered a medical condition, arising out of their employment with Employer over a period of time. Such claim has been rejected on the basis of section 7(4) of the Return to Work Act 2014. Taxpayer has disputed the rejection of their claim at the South Australian Employment Tribunal.

C. Employer denies that it has any liability to Taxpayer.

D. The parties agreed to settle the said claim and the differences between them on the terms of this agreement.

E. Taxpayer agreed to resign from their employment.

1.    Payments

1.1 Employer will pay to Taxpayer a settlement sum in addition to accrued entitlements to long service leave and annual leave, less tax deducted at the appropriate rate, within seven days of receiving both a duly executed copy of this Agreement from Taxpayer.

1.2 Employer will also pay to Taxpayer an ex-gratia contribution towards the costs of future medical treatment and future retraining courses.

2.    Release from claims

2.1 Taxpayer acknowledges that Employer pays the settlement sum in full settlement of all claims against Employer......arising from Taxpayer's employment with Employer...... and that the claim described in Recital B is settled with a denial of liability by Employer and solely to avoid further litigation. This Agreement must not be interpreted as an admission by Employer of liability to Taxpayer for any matter.

2.2 Taxpayer releases absolutely and discharges Employer....from all claims, actions, suits, causes of action, demands, liability, damages and costs.....arising in any way concerning or in the course of Taxpayer's employment with Employer or its cessation that Taxpayer has now or may have had in the future if the parties had not executed this Agreement.

2.4 By executing the within Agreement and by reason of Taxpayer resignation, Taxpayer acknowledges that Employer is relieved of any obligation to offer suitable employment pursuant to section 18(1) and sections 18(2) and 18(2) of the Return to Work Act 2014.

8. Independent Legal Advice

Taxpayer acknowledges that they had a reasonable opportunity to obtain independent legal advice concerning all aspects of this Agreement, and that they have carefully read and fully understand all the provisions of this Agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-10

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Section 82-145

We followed these ATO view documents

Taxation Ruling 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'

Reasons for Decision

Employment termination payment

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

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

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

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

Section 82-135 of the ITAA 1997 states:

The following payments you receive are not employment termination payments:

(a) a superannuation benefit (see Divisions 301 to 307);

(b) a payment of a pension or an annuity (whether or not the payment is a superannuation benefit); and

(c) an unused annual leave payment (see Subdivision 83-A);

(d) an unused long service leave payment (see Subdivision 83-B);

(e) the part of a genuine redundancy payment or an early retirement scheme payment worked out under section 83-170 (see Subdivision 83-C);

(f) ...

To determine if the Payment that was paid to you constitutes an ETP, all the conditions in section 82-130 of the ITAA 1997 must be satisfied.

Failure to satisfy any of the conditions will result in the Payment not being considered an ETP.

In consequence of termination of employment

The first condition requires that the Payment is received by the employee in consequence of the termination of his or her employment.

In your case there was a 'termination of employment' as you resigned your employment with the Employer.

The next issue to determine in relation to the first condition is whether the payment made to you was '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. 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'.

While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of the 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. It should be noted that the eligible termination payments ceased to exist from 1 July 2007 and were replaced by employment termination payments.

In paragraphs 5 and 6 of TR 2003/13 the Commissioner states:

...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 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.

In paragraph 6 of TR 2003/13, the Commissioner recognises that:

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 phrase in consequence of termination of employment has been interpreted by the courts in several cases.

Of note are the decisions made by the High Court in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325(McIntosh).

In Reseck Justice Gibbs stated:

Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination... It is not my opinion necessary that the termination of the services should be the dominant cause of the payment.

While Justice Jacobs stated:

It was submitted that the words 'in consequence of' import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a 'following on'.

In looking at the phrase 'in consequence of' the Full Federal Court in McIntosh considered the decision in Reseck.

Justice Brennan considered the judgments of Justice Gibbs and Justice Jacobs in Reseck and concluded that their Honours were both saying that a causal nexus between the termination and payment was required, though it was not necessary for the termination to be the dominant cause of the payment.

Suffice it to say that both Courts' views were that for a payment to be made in consequence of the termination of employment it had to follow on as a result or effect of the termination of employment. Additionally, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient.

Furthermore, in Le Grand v Federal Commissioner of Taxation [2002] FCA 1258; (2002) 124 FCR 53; (2002) 195 ALR 194; 2002 ATC 4907; (2002) 51 ATR 39 (Le Grand), the issue before the court was whether an amount received by the applicant as a result of accepting an offer of compromise in respect of claims brought by him against his former employer, in relation to the termination of his employment was in whole, or in part, an ETP. It was held that a settlement payment for litigation in relation to a taxpayer's dismissal was an ETP.

Justice Goldberg stated:

I am satisfied that there is a sufficient connection between the termination of the applicant's employment and the payment to warrant the finding that the payment was made "in consequence of the termination" of the applicant's employment. I am satisfied that the payment was an effect or result of that termination in the sense that there was a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment.

Justice Goldberg concluded that the test for determining when a payment is made in consequence of the termination of employment is that which was articulated by Justice Gibbs in Reseck. Thus, for the payment to have been made in consequence of the termination of employment, the payment must follow as an effect or result of the termination of employment. As earlier stated in paragraph 6 of TR 2003/13, there must be 'a causal connection between the termination and the payment even though the termination need not be the sole or dominant cause of the payment'.

The essence of this analysis is that if the payment follows as an effect or a result from the termination of employment, the payment will be made in consequence of the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. Hence the payment will be an ETP unless the payment is specifically excluded under section 82-135 of the ITAA 1997.

The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In your case, as mentioned previously, your employment was terminated when you resigned.

Subsequent to your termination of employment, a conciliation conference was held to resolve matters between you and the Employer. These matters related to a claim you had filed with the South Australian Employment Tribunal against the Employer alleging you suffered a psychiatric injury, namely anxiety and depression arising out of your employment with Employer over a period of time.

Through the conciliation process, a settlement Agreement was signed between you and the Employer. In the Agreement you agreed to the Employer paying you:

•         a $xxx gross settlement sum in addition to your accrued entitlements

•         an ex-gratia payment of $xxx for contribution towards the costs of future medical treatment, and

•         $xxx for future retraining courses.

You and the Employer agreed to settle the claim and your differences under the terms of the Agreement. Your settlement payment is to extinguish all claims and all matters relating to your workplace injury and any future obligation of the Employer to offer suitable employment pursuant to section 18 of the Return to Work Act 2014. A key condition of the Payment was that you terminate your employment.

As per paragraphs 5 and 6 of TR 2003/13, it is clear that but for the termination of employment by resignation on the specified date, the amount received for the execution of the Agreement and relating to not pursuing your Employer under section 18 of the RWA, would not be paid to you.

While the Agreement is a direct cause of the Payment, the Payment will not be made unless there is a termination of your employment. That is, there will be a sequence of events leading to the termination which had a relationship and connection, which ultimately led to the Payment. The various causes of action to be settled by the Agreement are interwoven and intertwined with termination of employment.

Therefore, the first requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

Payment received no later than 12 months after termination

In addition to meeting the other conditions for a payment to be an employment termination payment, 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 shown in the facts, your employment was terminated and the Payment was made to you within 12 months.

Accordingly, as the Payment was made within 12 months of the termination of your employment, the requirement in paragraph 82-130(1)(b) of the ITAA 1997 has been satisfied.

A payment mentioned in section 82-135 of the ITAA 1997

As previously mentioned, section 82-135 of the ITAA 1997 excludes certain payments from being ETPs. These payments include:

•         a payment for unused annual leave

•         a payment for unused long service leave

•         capital payments for personal injury.

In your case, the facts provided show that the Payment did not include any of the payments mentioned in section 82-135 of the ITAA 1997 which would preclude any part of the payment from being an ETP.

Consequently, the Payment is not of a type mentioned in section 82-135 of the ITAA 1997.

Conclusion:

The $xxx gross settlement sum in addition to your accrued entitlements, the ex-Gratia payment of $xxx for contribution towards the costs of future medical treatment and the $xxx for future retraining received by you is an ETP.