Edited version of private advice

Authorisation Number: 1052010506020

Date of advice: 25 July 2022

Ruling

Subject: Employment termination payments

Question

Are the payments received and to be received by you from your ex-employer employment termination payments in accordance with section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

You were employed by your ex-employer.

In the 20XX-XX income year your employment with your ex-employer was terminated following your demands pursuant to your employment contact.

In the 20XX-XX you made an application to the Fair Work Commission alleging breaches to the general protections under the Fair Work Act 2009.

In the 20XX-XX initial proceedings commenced within the Fair Work Commission. You alleged breaches of the Fair Work Act 2009 related to your employment contracts.

You alleged that your ex-employer repudiated your employment contacts that remained on foot and termination of your employment was primarily based on your demands.

In the 20XX-20XX income year you and your ex-employer agreed to a settlement with no admission of liability by any party. In settling differences, your ex-employer agreed to certain undertakings including the payment of a settlement sum (the Settlement Sum).

The Settlement Sum payments to you have been structured, at the shareholders and executive directors of your ex-employer's request, to satisfy trading circumstances and the cash flows of your ex-employer. Commencing in the 20XX-XX income year monthly instalments will be made on the first day of each month until the Settlement Sum, is paid in full, which is expected to be in the 20XX-XX income year.

You have provided the Settlement and Release Agreement between you, and your ex-employer.

You state that the dominant cause of the Settlement Sum payments are as a direct result of your demands and allegations including repudiation of your employment contracts which resulted in your termination.

You state that no superannuation payments are made in relation to the monthly instalments of the Settlement Sum. None of the Settlement Sum is considered ordinary times earnings for superannuation guarantee purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130.

Income Tax Assessment Act 1997 section 82-135.

Reasons for decision

Summary

Payments received and to be received by you from your ex-employer are employment termination payments.

Detailed reasoning

Employment termination payment

A payment is an employment termination payment (ETP) if it satisfies all the requirements in section 82-130 of ITAA 1997.

Subsection 82-130(1) of the ITAA 1997 states that a payment is an ETP 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.

To find that a payment is an ETP, all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any of one the three conditions will result in the payment not being considered an ETP.

Payment is made 'in consequence of the termination of' your 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....the Commissioner considers that 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 an 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.

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 made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In this case, your employment with your ex-employer was terminated following your demands pursuant to your employment contact.

In the 20XX-XX income year you made an application to the Fair Work Commission alleging breaches to the general protections under the Fair Work Act 2009. In the 20XX-XX income year initial proceedings commenced within the Fair Work Commission. In the 20XX-XX income year you and your ex-employer agreed to a settlement with no admission of liability by any party. In settling differences, your ex-employer agreed to certain undertakings including the payment of a settlement sum (the Settlement Sum).

Based on the above, the Settlement Sum is to be paid in consequence of the settlement of a dispute between you and your ex-employer. As the event that caused the dispute was the termination of your employment, it can be said that the payment follows as an effect or result of the termination of your employment with your ex-employer. That is, there was a sequence of connected events following the termination which ultimately led to the payment.

Therefore, the payment of the Settlement Sum is in consequence of the termination of your employment.

Payment is received no later than 12 months after that termination

Paragraph 82-130(1)(b) of the ITAA 1997 requires that the payment must be received no later than 12 months after the termination of employment.

However, paragraph 82-130(4)(a) of the ITAA 1997 states that the 12 month rule prescribed in paragraph 82-130(1)(b) of the ITAA 1997 will not apply if a person is covered by a determination made by the Commissioner under subsection 82-130(7) of the ITAA 1997.

The Employment Termination Payments (12 month rule) Legislative Instrument 2007 is a legislative instrument made by the Commissioner of Taxation pursuant to subsection 82-130(7) of the ITAA 1997. This instrument applies to employment termination payments received after 30 June 2007.

This instrument states that a payment received more than 12 months after termination of persons employment will be an employment termination payment if the delay in the payment was due to the commencement of legal action concerning either or both:

(a)          the persons entitlement to the payment;

(b)          the amount of the persons entitlement;

and the legal action was commenced within 12 months of the termination of employment.

1.         In this case, your employment with your ex-employer was terminated in the 20XX-XX income year and some payments will be made more than 12 months after the termination of your employment. However, you commenced legal action against your ex-employer within 12 months of the termination of your employment regarding that employment and entitlement to payments. The circumstances of the employment termination, the payment and the person making the payment have been considered. Therefore, the payment is exempt from the 12 month rule found in paragraph 82-130(1)(b) of the ITAA 1997.

Payments mentioned in section 82-135 of the ITAA 1997

Section 82-135 of the ITAA 1997 lists certain payments that are not ETPs. The Settlement Sum is not a payment mentioned in subsection 82-135 of the ITAA1997.

Conclusion

Payments received and to be received by you from your ex-employer are employment termination payments in accordance with section 82-130 of the ITAA 1997.