Edited version of private advice

Authorisation Number: 1052175815028

Date of advice: 11 October 2023

Ruling

Subject: Assessable income - employment termination payment

Question

Is the lump sum payment paid by Employer A under the terms of a 'Confidential Settlement Deed', subject to taxation as an employment termination payment (ETP) under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Employment contract background

You were employed for a specified period until your position was terminated and a settlement amount was paid to you during the ruling period.

On a specified date a Contract of Employment with Employer A was executed by you. You provided us with a copy of the Contract of Employment.

On a specified date a Deed of Assignment (Intellectual Property Rights) (Deed of Assignment-IPR) was executed by Employer A and you. You provided us with a copy of the Deed of Assignment-IPR.

On a specified date a Separation Deed was executed. You provided us with a copy of the Separation Deed.

Relevant legislative provisions

Income tax Assessment Act 1997 section 82-130

Reasons for decision

Detailed reasoning

The law and rulings

1.    Section 82-130 of the ITAA 1997 states:

(1)          A payment is an employment termination payment if:

(a)          it is received by you:

(i)            in consequence of the termination of your employment; or ...

(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.

Types of employment termination payment

(2)          A life benefit termination payment is an employment termination payment to which subparagraph (1)(a)(i) applies. ...

(4)          Paragraph (1)(b) does not apply to you if:

(a)          you are covered by a determination under subsection (5) ...

(5)          The Commissioner may determine, in writing, that paragraph (1)(b) does not apply to you if the Commissioner considers the time between the employment termination and the payment to be reasonable, having regard to the following:

(a)          the circumstances of the employment termination, including any dispute in relation to the termination;

(b)          the circumstances of the payment;

(c)          the circumstances of the person making the payment;

(d)          any other relevant circumstances ....

Employment termination payment (ETP)

2.    A payment is an ETP if it satisfies all the above requirements in section 82-130 of the ITAA 1997 and is not specifically excluded under section 82-135 of the ITAA 1997.

3.    The first consideration is whether the payment is made 'in consequence' of the termination of employment.

Paid 'in consequence' of the termination of employment

4.    The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Taking into account the courts decisions on the meaning of the phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are set out in Taxation Ruling 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).

5.    Paragraphs 5, 6, 7 of TR 2003/13 state that:

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.

7. The greater the length of time between the termination of employment and the payment, the more likely that the causal connection between the termination and the payment will be too remote for a conclusion that a payment was received in consequence of the termination of employment. However, length of time will not be determinative when there is a presently existing right to payment of the amount at the time of termination...

6.    At paragraph 32 of TR 2003/13 the Commissioner considers payments from a former employer to settle litigation:

32. The Federal Court in Dibb v. FC of T adopted the approach of Goldberg J in Le Grand. At issue was whether a payment received by the taxpayer under a deed of release, following the settlement of Federal Court proceedings against his former employer, was an ETP. In deciding the payment was an ETP, Heery J held that the length of time between the termination of employment, the commencement of court proceedings and payment following settlement did not sever the causal connection between the termination and the payment. It was sufficient that the subject matter of the litigation was the termination. Heery J found at 296 that:

'The various causes of action whether breach of contract, conspiracy, breach of fiduciary duty or contravention of the Trade Practices Act were, as Goldberg J would say (Le Grand at [36]), 'interwoven and intertwined' with the termination. The payment was a consequence of the settlement, which was a consequence of the Federal Court proceeding, which in turn was a consequence of the termination.'

Application of the law and ruling

Paid 'in consequence' of the termination of employment

7.    You have commenced employment with your employer on a specified date. The Contract of Employment included both general conditions of employment and specific conditions around Intellectual property Rights created or generated by you, some examples being at different clauses of the contract.

8.    The Deed of Assignment-IPR dated on a specified date, relates specifically to the potential acquisition by the Employer A of a platform which was created by you prior to your employment with the Employer A. The words and phrases, 'Deed, Intellectual Property Rights, Material, Questionnaire and Solution' are defined and all clarify the extent and operation of the Platform. There are clauses relating to conditions precedent, the due diligence process, and conditions subsequent.

9.    You asserted that Employer A breached the Deed of Assignment-IPR and that you suffered loss or damage as a result, which was denied by Employer A.

10.  On a specified date Employer A gave you notice that it had exercised its right to terminate the Deed of Assignment-IPR in accordance with its terms and further to that on a specified date they advised that as a result of restructure, your employment would end by reason of termination due to redundancy.

11.  The parties agreed to enter into the Separation Deed without admission of liability. The avoidance of 'any dispute concerning the cessation of the Employee's employment' and the purpose to 'resolve all matters between them, including but not limited to the Deed claims' were explicitly stated.

12.  In summary, over a specified period you moved from a position of employment and a potential sale of the platform to Employer A, to a position of redundancy and termination of the Deed of Assignment in respect of the platform.

13.  Accordingly, there were a series of related events that culminated in the execution of a Confidential Separation Deed on a specified date, the terms of settlement which provided for payments relating to redundancy, unused annual leave, payment in lieu of one month's notice, remuneration owing and a payment described as an 'ex gratia' payment without admission of liability.

14.  While the settlement made is a direct cause of the payments, the payments would not have been made unless there had been a termination of employment. That is, there was a sequence of events leading to the termination of your employment which had a relationship and connection leading to the settlement payment. These events align with paragraph 5 of TR 2003/13 where a payment is considered to have been 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.

15.  Under paragraph 6 of TR 2003/13 the phrase 'in consequence of' requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The Contract of Employment, Deed of Assignment-IPR, and Confidential Separation Deed all have a common thread in the form of a relationship between employment and the potential acquisition of the platform. It follows that a causal connection is evident in this case.

16.  Paragraph 32 of TR 2003/13 relates to payment from a former employer to settle litigation. The common law cited refers to various causes of action being 'interwoven and intertwined' with the termination. In this case a link and an interdependency existed between your employment duties and the concurrent use of the platform.

17.  As evidenced by the requirement in a specified clause of the Confidential Separation Deed for Employer A to destroy and/or delete all materials upon the termination date, inclusive of the platform, training materials and technical manuals provided by you, the payment has a causal connection with the termination.

18.  In summary, it is considered that the payment was received by you in consequence of the termination of employment, as per paragraph 82-130(1)(a) of the ITAA 1997.

Payment to be received no later than 12 months after termination

19.  Paragraph 82-130(1)(b) of the ITAA 1997 requires the ETP to be paid within 12 months of termination for the payment to be concessionally taxed under section 82-10 of the ITAA 1997. In this case, the requirement for the payment to be received within 12 months after termination is met.

Exclusions under section 82-135 of the ITAA 1997

20.  Section 82-135 of the ITAA 1997 provides that certain payments are not ETPs, including:

- unused annual leave and unused long service leave payments

- genuine redundancy and early retirement scheme payments up to the tax-free limit

- capital payments for personal injury as compensation for an inability to be employed.

21.  On the settled case law, no such exceptions apply to the taxpayer's circumstances. The payment is not excluded from being an ETP under section 82-135 of the ITAA 1997.

Life benefit termination payment

22.  Given that the ETP meets the requirements of subparagraph 82-130(1)(a)(i), it is a life benefit termination payment under subsection 82-130(2) of the ITAA 1997. Given the operation of sections 82-140 (tax free component of an ETP) and 82-145 (taxable component of an ETP), the whole payment will consist of a taxable component and this will be relevant to the taxation of the ETP under section 82-10 of the ITAA 1997.

Conclusion

23.  The payment made under the Confidential Separation Deed from Employer A, forms part of an ETP in accordance with section 82-130 of the ITAA 1997