Edited version of private advice

Authorisation Number: 1051957646071

Date of advice: 16 May 2022

Ruling

Subject: ETP - ex-gratia payment

Question 1

Is the ex-gratia payment you received from your former employer an eligible termination payment (ETP) under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the ex-gratia payment received from your former Employer a capital payment?

Answer

No.

This ruling applies for the following period:

Year Ending 30 June YYYY

The scheme commences on:

1 July YYYY

Relevant facts and circumstances

You provided a Deed of Release (Agreement). The Agreement is between you and the Employer.

Prior receiving the settlement payment (the Payment), you received an ETP that contained a redundancy amount that represents the maximum amount you are entitled to under the redundancy provisions.

You provided a Pay Advice for the 20XX income year that shows the settlement Payment and its taxation.

The Employer reported the settled Payment as lump sum C.

The Agreement provides:

DEED RECITALS

A.    The Worker commenced employment with Employer on xxxx ('Employment').

The Worker was employed pursuant to a contract dated xxxx ('Employment Agreement')

B.    The position of the Worker was made redundant.

C.   The Worker received a payment in lieu of notice and a redundancy payment of 4 weeks pay ('Termination Payments').

D.   The Worker commenced proceedings in the Fair Work Commission alleging that they had been unfairly dismissed in breach of the Fair Work Act, 2009 (Ctn) ('Proceedings'). The Employer denied that the Worker had been unfairly dismissed.

E.    Without admission of liability, the parties have agreed to resolve all issues on the terms set out in this deed.

The Employer

The Employer will:

2.1.1.    Provide the Worker with a statement of service; and

2.1.2.    Make an ex-gratia payment to the Worker of $xx,xxx (gross) ('Agreed Sum') to the nominated bank account

2.2.             The parties agree and hereby authorise the Employer to deduct from the Agreed Sum the relevant amount of tax and any other statutory liabilities payable.

2.3.             The Worker agrees to file a notice of discontinuance in the Proceedings within 3 days of receipt of the Agreed Sum.

2.4.             Each party will bear its own costs of the Proceedings and execution of this Deed.

2.5.             In consideration of the Agreed Sum, the Worker forever releases and discharges the Employer and any Related Entities, their directors, officers, employees, servants, agents or assigns from all Claims arising from the circumstances referred to in the Recitals, the Employment. the Employment Agreement, the Redundancy, the Termination Payments, the Proceedings and his employment with the Employer generally except for a claim relating to a breach or enforcement of this Deed.

2.6.             The Worker agrees and admits that the Agreed Sum in clause 2.1 is in full and final satisfaction of any liability the Employer and any Related Entities may owe to the Worker including, but not limited to, all and any entitlements under the Social, Community, Home Care and Disability Services Industry Award, Enterprise Agreement or any other industrial agreement or any contractual and/ or statutory entitlements.

2.7.             In consideration of the above, the Employer forever releases and discharges the Worker from the circumstances referred to in the Recitals, the Employment, the Employment Agreement, the Termination, Termination Payment, the Proceedings and his employment with the Employer generally except from a claim relating to any of the following:

2.7.1.    A breach or enforcement of this Deed;

2.7.2.    Any criminal conduct arising out of or directly related to the Employment (for the specified period);

2.7.3.    Any serious and/or wilful misconduct arising out of or directly related to the Employment (for the specified period); or

2.7.4.    Any conduct which did not occur in the course of, and did not arise out of, the Employment of the Worker (for the specified period).

The Worker

2.10.            The Worker warrants that he has entered this Deed of his own free will and without duress.

2.11.            The Worker warrants that:

2.11.1. He has had the opportunity to take independent legal advice as to the nature, effect and extent of this Deed;

2.11.2. The Employer, its directors, officers, servants or agents have not made any promise representation or inducement or been party to any conduct material to the entry into this Deed other than as set out in this Deed; and

2.11.3. He is aware that the Employer relying upon his warranty in executing this Deed.

Contentions

In your request you contend that the Payment that was paid to you under the Deed represents a capital payment as all contractual obligations with your employer had been resolved prior entering into this Deed.

Summary

The settlement Payment meets the legislative requirements of an eligible termination payment (ETP).

The tax withheld from the Payment it has been correctly withheld.

Detailed reasoning

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 Income Tax Assessment Act 1997 (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) ...

(i) 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); ...

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 were made redundant from your employment on xx June YYYY.

The next issue to determine in relation to the first condition is whether the Payment was made to you '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 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 state that:

...the Commissioner considers that a payment is received by a taxpayer in consequence of the taxpayer's termination of the employment 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.

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.

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 Fair Work Commission against the Employer as being unfairly dismissed.

Through the conciliation process, the Deed was signed between you and your Employer. In the Deed you agreed the Employer pays you a Payment to settle all claims of money owned to you under the Award with no admission of liability. The Employer treated this Payment as an ETP.

Accordingly, based on the provided information the Payment was made 'in consequence of' the termination of your employment as 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 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 ETP, 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 the Payment was made to you within 12 months of your termination of your employment.

Accordingly, 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 employment termination payments. The relevant exclusions to be considered are:

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

(i) 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); ...

In this case, we decided that there is no need to further consider if this Payment represent a genuine redundancy payment as the amount that was paid to you as part of your first ETP fully utilised your tax-free redundancy entitlement.

Payments excluded under paragraph 82-135(i) of the ITAA 1997 represent payments or benefits that compensate or reimburse the person for or in respect of the particular injury.

To determine whether the Payment falls within the exclusion set out in paragraph 82-135(i) of the ITAA 1997, consideration must turn to whether you had a 'personal injury', what this payment was actually paid for and whether the payment is reasonable having regard to the nature of the personal injury and its likely effect on one's capacity to derive income from personal exertion.

We have considered the information you provided with your ruling request and neither you nor the Deed support that the Payment was paid to you because of a personal injury that is likely to affect your capacity to derive income from personal exertion.

Additionally, Clause x.x of the Deed states that without admission of liability, the Payment was made to you to settle all claims of money that may have been owned to you under the Award.

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

Conclusion

The Payment received by you meets all the conditions in section 82-130 of the ITAA 1997 and thus is an ETP.

Subsection 82-10(2) of the ITAA 1997 provides that the taxable component of a life benefit termination payment (LBTP), which the Payment in your case satisfies, is assessable income. Accordingly, it is to be included in your income tax return for the relevant income year.

In relation to the rate of tax that applies to the Payment, subsection 82-10(3) of the ITAA 1997 specifies that a taxable component is subject to tax and the rate applied depends on the recipient's age.

As you are less than 60 years of age, the Payment is taxed at a maximum rate of 30% plus Medicare levy. Accordingly, the tax, which the Employer withheld from the Payment, is correct.

Relevant legislative provisions

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 Subsection 82-130(2)

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Section 82-145