Edited version of private advice

Authorisation Number: 1051978792981

NOTICE

The private ruling on which this edited version is based has been overturned in part on objection.

Date of advice: 23 August 2022

Ruling

Subject: Employment termination payment settlement

Question 1

Is the payment for pain and suffering an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the payment for future medical expenses of an employment termination payment under section 82-130 of the ITAA 1997?

Answer

Yes.

Question 3

Is the payment for past economic loss of an employment termination payment under section 82-130 of the ITAA 1997?

Answer

Yes.

Question 4

Is the payment for exemplary damages of an employment termination payment under section 82-130 of the ITAA 1997?

Answer

Yes.

Question 5

Is the payment for Comcare permanent impairment an employment termination payment under section 82-130 of the ITAA 1997?

Answer

Yes.

Question 6

Is the payment for pay in lieu of notice an employment termination payment under section 82-130 of the ITAA 1997?

Answer

Yes.

Relevant facts and circumstances

Your employer formed the view that the payments of future economic loss and legal costs were not an ETP. Therefore, the amount of future economic loss and legal costs are not included in the income statement and the employer did not withhold any PAYG tax on those amounts.

You (the Employee) entered a Deed of Release (Agreement) with your Employer. A condition of this Agreement was that you resign your employment.

You provided Medical certificates from Medical General Practice and Psychologist.

Your Employer formed the view that the payments of future economic loss and legal costs were not an ETP. Therefore, the amount of future economic loss and the amount allowed for legal costs are not included in the income statement and the employer did not withhold any PAYG tax on those amounts. You agreed with that view.

The Employer considered that the total settlement sum less future economic loss and the amount allowed for legal costs would form the ETP. You disagreed with that view but agreed to settle the matter on that basis but reserved your right to apply to the ATO on whether the amounts were an ETP.

On xxxx the Employer stated there was a discrepancy between the value of the ETP arising from the Deed of Release and the value of the ETP pursuant to the ATO's records. The Employer described the additional payment as a payment in respect of accrued but untaken annual leave. The Employee has been advised that the payment was in fact a payment in lieu of notice. The Employer has therefore amended the previous correspondence.

A settlement Agreement was signed between you and the Employer. In the Agreement you agreed to the Employer paying you for:

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 Paragraph 82-130(1)(b)

Income Tax Assessment Act 1997 Section 82-135

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)    ...

(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 resigned your employment with the Employer in late 20XX.

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 ceased in late 20XX.

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 XXXXXX Employment Tribunal against the Employer alleging you suffered Personal injury, 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 for:

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.

It is clear from the decision in Le Grand, that when a payment is made to settle a claim brought by a taxpayer for wrongful dismissal or claims of a similar nature that arise as a result of an employer terminating the employment of the taxpayer, the payment will have a sufficient causal connection with the termination of the taxpayer's employment. The payment will be taken to have been made in consequence of the termination of employment because it would not have been made but for the termination.

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 in late 20XX and the Payment was made to you on late 20XX.

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

•         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 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.

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

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

Conclusion:

The gross settlement payment in addition to your accrued entitlements, received by you is an ETP.

An ETP may comprise of a:

•         Tax free component - as provided in section 82-140 of the ITAA 1997, this includes an invalidity segment within the meaning of section 82-150 (if any) and/or a pre-July 83 segment within the meaning of section 82-155 (if any); and

•         Taxable component - the amount remaining after deducting the tax-free component from the total payment, as prescribed in section 82-145 of the ITAA 1997.

As shown in the facts, the Payment does not contain an invalidity segment within the meaning of section 82-150 of the ITAA 1997 but is comprised wholly of taxable component.

Subsection 82-10(2) of the ITAA 1997 provides that the taxable component of a life benefit termination payment, which the Payment in your case satisfies, is assessable income. Accordingly, it is to be included in your income tax return for the 20XX-XX 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.