Edited version of private advice

Authorisation Number: 1052202113257

Date of advice: 12 December 2023

Ruling

Subject: Employment termination payment

Question

Is the lump sum payment of $XXX paid by Company A (the former employer) to Individual A (the Taxpayer), under the terms of a settlement agreement dated DD February 20YY, 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 20YY

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

The Taxpayer commenced employment with Company A on DD September 20YY.

The Taxpayer was employed in an analyst position.

The Taxpayer's employment was terminated on DD November 20YY.

The Taxpayer made an application to the Fair Work Commission alleging that the former employer dismissed them from their employment in breach of the general protections provisions of the Fair Work Act 2009.

The former employer denied the allegations.

On DD February 20YY, the Taxpayer entered into a settlement agreement with the former employer, and agreed to settle the matter with the payment to Taxpayer of $XX,XXX.XX, within 14 days of the agreement being signed.

As per the terms of the settlement agreement, the payment of the above amount released and discharged the former employer from any past, present, or future liabilities.

The Taxpayer received a payment of $XX,XXX.XX on DD February 20YY.

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

Income Tax Assessment Act 1997 section 82-145

Reasons for decision

Summary

The taxpayer received an Employment 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

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 ...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.

Employment termination payment (ETP)

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.

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

Paid 'in consequence' of the termination of 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. 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: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13).

Paragraphs 5 and 6 of TR 2003/13 state that:

5....the Commissioner considers that a 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 made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

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.'

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.

In this case there was a dispute between the Taxpayer and the former employer.

The Taxpayer had made claims against the former employer.

The Taxpayer and the former employer agreed to settle the claims by means of payment of an amount of $XX,XXX.XX.

As per paragraphs 5 and 6 of TR 2003/13, it is clear that but for the termination of the Taxpayer's employment, the payment would not have been paid.

While the settlement resulted in the payment being made, 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 payment being made.

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.

Payment to be received no later than 12 months after termination

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, as the termination and payment dates were DD November 20YY and DD February 20YY respectively.

Exclusions under 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.

As none of the exclusions apply, the payment is not excluded from being an ETP under section 82-135 of the ITAA 1997.

Conclusion:

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

Given that the ETP meets the requirements of section 82-130, it is a life benefit termination payment under subsection 82-130(2) of the ITAA 1997.

The entirety of the payment of $XX,XXX.XX will consist of the taxable component of an ETP, as per section 82-145 of the ITAA 1997.

It will be taxed accordingly under section 82-10.

[1] (2003) 53 ATR 290