Edited version of private advice

Authorisation Number: 1052238153125

Date of advice: 8 April 2024

Ruling

Subject: ETP - whether all or part of the payment is an excluded payment

Question

Is any part of the employment termination payment (ETP) totalling $XXX,XXX an excluded payment under paragraph 82-10(6)(d) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Period ending on 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

•           You commenced employment with the Employer and it's related subsidiaries in 20XX.

•           You held the position of managing director and a statutory office of registered director of the Employer and the subsidiaries until XX/XX/XXXX.

•           On XX/XX/XXXX you sent an email to the Employer that contained a powerpoint summary of Australian transfer pricing laws.

•           On XX/XX/XXXX you sent another email to the Employer concerning the Australian transfer pricing laws.

•           Due to ongoing disagreements with the Employer about the correct application of the Australian transfer pricing laws, you lodged intelligence with the Australian Taxation Office, on XX/XX/XXXX.

•           On the same day, you also lodged an F8C form with the Fair Work Commission (FWC) for General Protection, seeking Protection due to Coercion and Undue Influence and Pressure (the Application).

•           On XX/XX/XXXX, you received a letter from the Employer's senior solicitor, raising the Employer's concerns about your actions. This letter also notified you that:

-        you had been removed from the Statutory Office of registered director of the Employer and it's subsidiaries

-        your accesses to your regular phone number and work email had been removed

-        a replacement email address and new telephone number would be provided to you in due course

-        you had been placed on special leave and directed to not attend the Employer's work premises or contact staff members or clients.

•           On XX/XX/XXXX, you and the Employer agreed to settle your differences via deed of release (the Deed) that was executed on the same date.

•           Recitals X, X, and X acknowledge that:

-        you lodged the Application with the FWC

-        on XX/XX/XXXX the Employer filled a Response to the Application, denying it took any adverse action against you; and

-        as a result of a conference before the FWC on XX/XX/XXXX, without admission to liability, you and the Employer reached an agreement to settle all matters relating to your employment in the position, and the statutory office, upon the terms set out in the Deed.

•           Recital X of the Deed states that your employment 'will end by way of your resignation by the operation of this deed on XX/XX/XXXX ("the Termination Date")'.

•           Clause X lists the relevant payments and benefits you accepted under the Deed. The payments that are the subject of this ruling are listed under clauses X and X. These are:

-        $XXX,XXX gross, representing 12 months' pay in lieu of notice to be treated as an Employment Termination Payment for tax purposes; and

-        $XX,XXX gross representing an ex gratia payment in addition to the 12 months' pay in lieu of notice in clause X to be treated as an Employment Termination Payment for tax purposes.

-        ....

•           Release clause X states that 'in consideration of the payments and benefits set out in clause X, the Employee (you) unconditionally and irrevocably releases and discharges the Employer, the Subsidiaries and any Related Body Corporate, and each of its, and their directors, officers, employees or agents from all Claims and liabilities of any nature'...

•           Warranty clause X states that the Employee (you) 'has taken independent legal advice, or has been given the opportunity to take legal advice, as to the nature, effect and extent of this deed'.

•           Sub-clause X then states that 'this deed contains the entire agreement between the parties... It sets out the only conduct relied on by the parties and supersedes all earlier representations and conduct made by, or existing between, the parties with respect to its subject matter'.

•           The Employer issued a final payslip on XX/XX/XXXX and an income statement on XX/XX/XXXX. The income statement lists the ETP totalling $XXX,XXX as ETP type 'O', with the full amount representing a taxable component.

•           A private binding ruling issued to you on XX/XX/XXXX under authorisation number XXXXXXXXXXXXX determined the payments totalling $XXX,XXX constituted an ETP.

•           On XX/XX/XXXX, you provided documentary evidence to support your contentions that the dismissal was due to harassment. This evidence has been captured above.

Contentions

On XX/XX/XXXX, you provided contentions to support your claims of mistreatment and harassment that led to your dismissal.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-10

Income Tax Assessment Act 1997 subsection 82-10(2)

Income Tax Assessment Act 1997 subsection 82-10(3)

Income Tax Assessment Act 1997 subsection 82-10(4)

Income Tax Assessment Act 1997 subsection 82-10(6)

Income Tax Assessment Act 1997 section 82-130

Reasons for decision

Summary

No part of the ETP totalling $XXX,XXX meets all the requirements prescribed under paragraph 82-10(6)(d) of the ITAA 1997. Accordingly, the whole-of-income cap amount of $180,000 will be used to determine if you are entitled to a tax offset for any part of the ETP, in accordance with subsection 82-10(3) of the ITAA 1997.

Detailed reasoning

Section 82-10 of the ITAA 1997 prescribes the taxation of life benefit ETPs.

Subsection 82-10(2) of the ITAA 1997 states that the taxable component of the payment is assessable income.

Subsection 82-10(3) of the ITAA 1997 states that you are entitled to a tax offset that ensures that the rate of income tax on the amount mentioned in subsection (4) does not exceed:

(a)          if you are your preservation age or older on the last day of the income year in which you receive the payment - 15%; or

(b)          otherwise - 30%.

Subsection 82-10(4) of the ITAA 1997 prescribes the relevant ETP caps that the taxable component of the ETP payment is assessed against. Paragraph 82-10(4)(c) of the ITAA 1997 states that:

(c)          if the payment is not an excluded payment - $180,000, reduced (but not below zero) by your taxable income for the income year in which the payment is made.

So, where the ETP does not have an excluded payment component, the whole-of-income cap amount of $180,000 is used to assess if you are entitled to a tax offset prescribed in subsection 82-10(3) of the ITAA 1997.

You contend that your employment was unfairly terminated due to harassment and that for this reason the whole ETP is made of excluded payments, satisfying the requirements of paragraph 82-10(6)(d) of the ITAA 1997.

Paragraph 82-10(6)(d) of the ITAA 1997 states that paragraph (4)(c) does not apply in relation to life benefit termination payments:

(d)          that:

(i)      are paid in connection with a genuine dispute; and

(ii)     are principally compensation for personal injury, unfair dismissal, harassment, discrimination or a matter prescribed by the regulations; and

(iii)     exceed the amount that could, at the time of the termination of your employment reasonably be expected to be received by you in consequence of the voluntary termination of your employment.

For the payment to be treated as an excluded payment, it needs to meet all three requirements prescribed above.

You provided documentary evidence supporting the payment was made because of a genuine dispute. The executed Deed of Release (the Deed) also supports that the received payment exceeds the amount you would have received in consequence of a voluntary termination.

The Deed, however, does not support that the payment was principally compensation for personal injury, unfair dismissal, harassment, discrimination or a matter prescribed by the regulations.

Subclause X of the Deed states that the Deed contains 'the entire agreement between the parties' and that it 'supersedes all earlier representations and conduct'.

Recital X of the Deed further states that both parties reached an agreement 'without admission to liability'.

Further, the Deed is not ambiguous when it comes to describing the nature of the relevant payments. It clearly states what these payments are for and that both payments will be treated as ETPs for tax purposes. The relevant payments are described as follows:

-        $XXX,XXX gross, representing 12 months' pay in lieu of notice to be treated as an Employment Termination Payment for tax purposes; and

-        $XX,XXX gross representing an ex gratia payment in addition to the 12 months' pay in lieu of notice in clause X to be treated as an Employment Termination Payment for tax purposes.

By executing the Deed, you agreed to terminate your employment voluntarily in exchange for receiving the above benefits.

The Deed also contains a number of warranties, one of which states that you were 'given the opportunity to take legal advice, as to the nature, effect and extent of this deed'.

The Deed is a legal document. If you were concerned about, or disagreed with, its content, or were under duress, you could have exercised your right to refuse to sign it without legal representation.

In summary, the executed Deed does not support your claim that the relevant payments are principally compensation for 'personal injury, unfair dismissal, harassment, discrimination or a matter prescribed by the regulations'.

Conclusion

For the above listed reasons, we are not satisfied that you meet all the requirements prescribed in paragraph 82-10(6)(d) of the ITAA 1997, in particular, subparagraph 82-10(6)(d)(ii), for the payment to be treated as an excluded payment.

Accordingly, the ETP will be assessed in accordance with paragraph 82-10(4)(c) of the ITAA 1997, meaning that the whole-of-income cap amount of $180,000 will be used to determine if you are entitled to a tax offset for any part of the ETP.