Edited version of private advice

Authorisation Number: 1052165220326

Date of advice: 15 September 2023

Ruling

Subject: Employment termination payment

Question

Is the settlement payment received by the taxpayer from their employer an employment termination payment in accordance with section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

The taxpayer commenced their employment with their employer (the Employer) in the 2022-23 income year.

During the 2022-23 income year, the taxpayer informed the Employer of their resignation via email.

During the 2022-23 income year, the taxpayer sent a letter to the Employer stating the reasons for their resignation and requesting an amount to be paid.

The Employer, in a letter of response and offer advised the following:

•         The Employer denies all allegations

•         The Employer are of the view that no additional monies are payable to the taxpayer.

•         To resolve the matter the Employer are prepared to pay you the amount requested on the basis that this will be the final amount paid to the taxpayer, and on the basis the parties enter into a Deed of Settlement and Release to confirm that this payment provides mutual release and indemnities in respect of all matters arising from, or in connection to the matter of the taxpayer's employment.

During the 2022-23 income year, the taxpayer received an offer of payment to settle the matter without prejudice.

A deed of settlement and release (the Deed) between the taxpayer and the Employer was entered into and executed in the 2022-23 income year.

Payment under the Deed was made in the 2022-23 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130.

Income Tax Assessment Act 1997 section 82-135.

Income Tax Assessment Act 1997 section 83-170.

Income Tax Assessment Act 1997 section 83-175.

Reasons for decision

Summary

The settlement payment is an employment termination payment.

Detailed reasoning

Employment termination payment

A payment is an 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, the taxpayer resigned from their employment in the 2022-23 income year. Subsequently, the taxpayer sent a letter to the employer stating reasons for their resignation and requesting a payment to be made.

To resolve the matter, a settlement amount was made to the taxpayer in accordance with the Deed. It can be said that the settlement payment follows as an effect or result of the termination of the taxpayer's employment. That is, there was a sequence of connected events following the termination which ultimately led to the settlement payment.

Therefore, the settlement payment was received in consequence of the termination of the taxpayer's employment.

Payment is received no later than 12 months after that termination

In this case, the settlement payment was received no more than 12 months after the termination of the taxpayer's employment with the Employer.

Payments mentioned in section 82-135 of the ITAA 1997

Section 82-135 of the ITAA 1997 lists certain payments that are not ETPs. No part of the settlement payment is a payment mentioned in subsection 82-135 of the ITAA 1997.

Conclusion

The total settlement payment received by the taxpayer in the 2022-23 income year, is an ETP in accordance with section 82-130 of the ITAA 1997.

Section 82-145 of the ITAA 1997 defines taxable component of an ETP.