Edited version of private advice

Authorisation Number: 1052181582349

Date of advice: 15 November 2023

Ruling

Subject: Early termination payment

Question

Is the lump sum payment of $XX paid by XX (former Employer) to the XX (the Taxpayer), under the terms of a 'Deed of release agreement' dated 29 June 20XX, 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 ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.    The taxpayer commenced employment with XX and it's related subsidiaries in 20XX with a handshake agreement with no formal employment contract signed.

2.    The taxpayer was employed in various roles with the latest role being a Managing Director.

3.    On a number of occasions, there were meetings/communications held by the employer in which the taxpayer was not included.

4.    On 11 June 20XX, the taxpayer made and application to the Fair Work Commission for General Protection and detailed Protection, Coercion and Undue Influence and Pressure.

5.    On 20 June 20XX, the taxpayer received correspondence from the employer's solicitor advising:

•         Taxpayer's positions as a director were removed

•         Taxpayer's usual work email and phone number were denied access

•         A replacement email address and new telephone number was provided

•         Taxpayer was directed to not attend work premises or contact staff members or clients.

6.    On 29 June 20XX, the employer and the employee reached an agreement to settle all claims arising out of the employee's employment, the position, the statutory office, on terms set out in the 'Deed of Release' dated on the same day.

7.    Deed of Release stated the employment will end by way of the taxpayer's resignation at 5:00pm on 3 July 20XX.

8.    The employer issued a final payslip on 6 July 20XX and the income statements on 17 July 20XX. The payment of $XX was disclosed as an ETP taxable component.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Reasons for decision

Summary

The taxpayer received Early Termination Payment (ETP) as defined under section 82-130 of the Income tax Assessment Act 1997 (ITAA 1997), as all of the requirements set out in the legislation have been satisfied in this case.

Detailed reasoning

The law and rulings

Reasons for Decision

9.    Section 82-130 of the Income Tax Assessment Act 1997 (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.

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

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

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

(4)  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)

10.  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.

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

Paid 'in consequence' of the termination of employment

12. 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).
13. Paragraphs 5 and 6 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.

14. 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[1] 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.'

15. The payments in these cases were ETPs because there was a sequence of connected events following the termination which ultimately led to the payment. The payments would not have been made but for the termination.
16. In this case the taxpayer had made claims against XX in relation to business practises which related to the legality of company's operational and financial decisions which may have contravened Australian taxation law.
17. The taxpayer and the employer agreed to settle the matter outside of the courts by way of a Deed of Release with the acceptance of payment to the sum of $XX and the taxpayer would resign from his employment with XX.
18. As per paragraphs 5 and 6 of TR 2003/13, it is clear that but for the termination of the taxpayer's employment, the amount received by the taxpayer under the Deed of Release Agreement would not have been paid.
19. While the settlement made is a direct cause of the payment, the payment 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 the taxpayer's employment which had a relationship and connection leading to the settlement payment. The causes of action settled under the Deed of Release Agreement are interwoven and intertwined with termination of employment.
20. Therefore, it is considered that the settlement payment was received by the taxpayer in consequence of the termination of employment, as per paragraph 82-130(1)(a) of the ITAA 1997.

Conclusion

The payment from the employer of $XX is an ETP in accordance with section 82-130 of the ITAA 1997.

[1] (2003) 53 ATR 290.