Edited version of private advice

Authorisation Number: 1052151104851

Date of advice: 8 August 2023

Ruling

Subject: Employment termination payment

Question

Is the compensation payment for general damages you received in accordance with a deed of settlement and release an employment termination payment as defined in section 82-130 of the Income Tax Assessment Act 1997?

Answer

Yes.

This private ruling applies for the following period:

30 June 20YY

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

In early 20YY you commenced employment with the Employer.

In early 20YY the Employer demoted you.

In early 20YY the Employer terminated your employment,

You commenced legal action against the Employer within 12 months of the termination of your employment.

Your claims include the following:

•         The Employer took adverse action against you in:

                (i) effecting the Unilateral Role Change;

                (ii) effecting the Selection for Redundancy; and

                (iii) effecting the Failure to Provide Suitable Alternative Role; and

                (iv) by effecting the Dismissal.

•         your claims of evidence consistent with there being a causal link between the adverse action taken and the unlawful reasons alleged including:

                (a) the fact that there was no justification provided for the Unilateral Role Change;

                (b) the close temporal proximity between your exercise of workplace rights and the Unilateral Role Change;

                (c) the fact that there was no justification provided regarding your redundancy, indicating it was non-genuine;

                (d) the fact that you were the only employee made redundant;

                (e) the fact that there remained plenty of work for you to perform, indicating the redundancy was non-genuine;

                (f) the fact that the Employee recently hired another employee; and

                (g) the fact that you were suitable for a vacant role with the Employer.

•         Your claim that the Employer's has caused you a loss of income and non-economic loss arising from the hurt and distress occasioned by the unlawful termination of your employment.

You and the Employer have agreed to settle all claims arising from your employment, your demotion and the termination of your employment on the terms contained in a Deed of Settlement and Release (the Deed). You have provided a copy of the Deed.

You have provided a copy of an Income Statement with a reported date more than 12 months after the termination of your employment which shows an amount was made to you in accordance with the Deed.

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

Reasons for decision

Summary

The compensation payment for general damages you received in accordance with a deed of settlement and release is an employment termination payment.

Detailed reasoning

An employment termination payment, where the payment is made during the life of a taxpayer, is known as a life benefit termination payment (subsection 82-130(2) of the Income Tax Assessment Act 1997 (ITAA 1997)).

Section 995-1 of the ITAA 1997 states that:

employment termination payment has the meaning given by section 82-130 of the ITAA 1997.

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

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.

To determine if the general damages payment you received in accordance with the Deed of Settlement and Release dated (the Deed) constitutes an employment termination payment, all the conditions in section 82-130 of the ITAA 1997 will need to be satisfied.

Failure to satisfy any of the conditions will result in the payment not being considered an employment termination payment. Furthermore, any termination payments received outside of the 12 months are taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12 month rule.

In consequence of the termination of your employment

The Commissioner's view on the meaning of the phrase 'in consequence of; in the context of termination of employment is set out in Taxation Ruling TR 2003/13 Income tax: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of'.(TR 2003/13).

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

  5. ...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. 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.

From the facts provided, your employment with the Employer was terminated in mid 20YY. Following the termination of employment, proceeded with legal action against the Employer.

Under the Deed, a general damages payment was made to you. The payment would not have been made had there been no termination of employment. The termination of employment and the payment are intertwined and connected. The general damages payment is considered to be received by you in consequence of the termination of your employment. Therefore, the requirement of subparagraph 82-130(1)(a)(i) of ITAA 1997 has been met.

The 12 month rule set out in paragraph 82 130(1)(b) of the ITAA 1997

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.

In this case, your employment with the Employer was terminated in mid 20YY. You have provided a copy of an Income Statement with a reported date more than 12 months after the termination of your employment which shows an amount was made to you in accordance with the Deed. However, you commenced legal action within 12 months of the termination of your employment. Therefore, the payment is exempt from the 12 month rule found in paragraph 82-130(1)(b) of the ITAA 1997.

Payment is not a payment mentioned in section 82-135 of the ITAA 1997

Certain payments made on termination of employment are excluded from being an employment termination payment under section 82-135 of the ITAA 1997. These payments include any accrued annual and long service leave, the tax-free parts of a genuine redundancy payment or an early retirement scheme payment as well as other types of payments which do not apply to your settlement payment.

Under section 82-130(1) of the ITAA 1997 consideration must be given to whether the specific exemption for personal injury in paragraph 82-135(i) of the ITAA 1997 (payments that are not employment termination payments) applies. This subsection states that employment termination payments do not include:

(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);

This exclusion is for a payment or benefit that compensates or reimburses a person for or in respect of the particular injury.

In Commissioner of Taxation (Cth) v. Scully (2000) 201 CLR 148; [2000] HCA 6; (2000) 2000 ATC 4111; (2000) 43 ATR 718 the High Court held that compensation must be calculated by reference to the nature and extent of the injury or likely loss to the taxpayer. The payment in this case was not in respect of personal injury, acting Chief Justice Gaudron and Justices McHugh, Gummow and Callinan stating in their joint decision:

  41. In our opinion, the payment in this case cannot be characterised as consideration... in respect of, personal injury. The fact that the payment is not calculated by reference to the nature and extent of the injury or likely loss to the respondent and the fact that the other benefits are similar to that for total and permanent disablement point inevitably to the conclusion that the payment was consideration... for, or in respect of the respondent's termination of employment and her rights under the Trust Deed and was not consideration... for, or in respect of her injury.

In the Administrative Appeals Tribunal (AAT) decision AAT Case 11,722 (1997) 35 ATR 1114; (1997) 97 ATC 258 a taxpayer negotiated a settlement with their past employer by agreeing to a certain amount and that they would accept to forgo all past, present and future claims against the employer, except for personal injury. Senior Member Dwyer ruled that, given the 'exception' in the settlement clause, no amount of the settlement could be for personal injury, therefore the ETP exclusion provisions could not apply to the amount.

There are three types of injury that a person can receive:

(a)                 behavioural injury - one that involves physical injury (internal and/or external) and/or mental illness that is clearly discernible to a qualified medical practitioner;

(b)                 non-behavioural injury - hurt, distress, anxiety, etc., that flows from the death of, or serious injury to, a relative or close friend; wrongful dismissal; defamation; etc. This type of injury may have legal remedies under the law of torts (e.g., defamation, slander), statute (e.g., sexual harassment, discrimination), or contract (e.g., employment, professional negligence); and

(c)                 property injury - damage to a persons property.

Notwithstanding it may be said that all three types of injury may be personal, it is considered that only the first type (i.e. behavioural injury) falls within the meaning of the term personal injury.

The reasoning above is based on the decision by the Victorian Supreme Court in Graham v. Robinson [1992] 1 VR 279 (Graham v. Robinson) where the Court had to decide if emotional hurt (i.e. hurt, distress, public scandal, hatred, odium, ridicule and contempt) was a personal injury. At 281, Justice Smith stated:

  In the absence of express authority, I have come to the conclusion that the expression personal injury does not extend beyond physical injury and mental illness to include emotional hurt. I am encouraged to this view by the fact that the law has rejected grief or sorrow as a form of injury which can be relied on to mount a claim in negligence: Mount Isa Mines Ltd. v. Pusey (1970) 125 CLR 383, at p. 394 and Jaensch v. Coffey (1984) 155 CLR 549, at p. 587. It is true that damages are awarded for pain and suffering in the typical personal injury case. They are awarded, however, where pain and suffering flow from and are connected with physical or mental injury and may therefore be said to be damages in respect of personal injury.

The decision in Graham v. Robinson was applied in the AAT decision McMahon v. Commissioner of Taxation Case [1999] AATA 5; (1999) 41 ATR 1056; (1999) 99 ATC 2025 (McMahon) in relation to a payment for alleged damage to a taxpayers reputation. In McMahon, a critical performance appraisal of the taxpayer and other comments were published in the media. Subsequent to this, the taxpayers employment was terminated and it was agreed to pay him certain amounts including an amount for the alleged damage to his reputation. Senior Member Block stated:

  26 The tribunal also notes the stipulation in the concluding portion of s 27A(1)(n) of the Act that the amount of consideration for personal injury is to be regarded as an ETP only to the extent that it is reasonable having regard to the nature of the injury and the taxpayers capacity to derive income from personal exertion. The tribunal considers that the inclusion by the legislature of the words from personal exertion tends to confirm that the section is intended to exclude from the definition of ETP payments in respect of injuries to the person, where such injuries being physical injuries or mental illnesses which have an assessable and identifiable impact on the capacity of the taxpayer to earn income. The tribunal considers in summary that an injury to person is distinguishable from an injury to a persons reputation.

  27 For the Reasons set out previously (and bearing in mind that the decision in Graham v. Robinson is binding on the tribunal), the reputation payment was not made in respect of personal injury within s27A(1)(n) of the Act which does not operate to exclude it from the provisions of s. 27A of the Act; accordingly the reputation payment was correctly assessable as an ETP.

To reiterate, there must be a 'behavioural' type personal injury. From the above case, the term 'personal injury' is limited to physical and/or mental injury.

It is noted in the information provided and as per the facts of this case, a general damages payment was made to compensate you as part of the Deed. There is no link between the payment and personal injury. As such, the payment cannot be said to be made in respect of your behavioural type personal injury.

In view of the above, paragraph 82-135(i) of the ITAA 1997 does not exclude the entire amount of the general damages payment from being an ETP. Therefore, the requirement under paragraph 82-130(1)(c) of the ITAA 1997 is satisfied.

Conclusion

The general damages payment you received in accordance with the Deed was paid in consequence of the termination, is exempt from the 12 month rule and was not a payment under section 82-135 of the ITAA 1997 Therefore, the payment is an ETP.