Edited version of private advice

Authorisation number: 1052251955425

Date of advice: 27 June 2024

Ruling

Subject: Lump sum payment

Question

Is the lump sum payment paid by your former employer, under the terms of the 'Deed of release" dated DD MM 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, the payment to taxpayer is an ETP.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On DD MM 20XX you entered into a contract of employment (contract) with your then employer (employer) as a full-time XXXXXX.

On DD MM 20XX, you commenced your employment with the employer.

The contract provided for a three-week roster with ordinary hours revolving around being available 24 hrs/7 days per week, but specifically on duty for 12 hour per day and being on standby for 12 hours per day. This was to be followed by a three-week off duty period.

On DD MM 20XX, your position was made redundant, and the employment relationship came to an end.

On DD MM 20XX, you filed a claim in the Industrial Magistrates Court (the Court) seeking compensation and damages arising from your employer's failure to comply with the Ambulance and Patient Transport Award 2020 during the period from DD MM 20XX to DD MM 20XX. You were represented by your Union. The order's sought was a payment in the amount of $XX for under-award payments, interest and penalties.

The basis of the claim is of follows:

•         Entitled to count 'stand-by' duties as time worked as part of a shift pursuant to clause 20.7 of the award; and

•         Entitled to triple time for work done after 12 consecutive shifts without 24 hours off duty pursuant to clause 13.3 (b) of the award.

•         Entitled to double time when called to duty during a 'stand-by' period for a minimum of 1.5 hours per call, provided that 1.5 hours had elapsed since the previous call.

You had several other grievances against your former employer which you also intended to have remedied through the judicial systems. These included:

•         A personal eye injury you suffered whilst on duty

•         A claim revolving around the discrimination involving your employer's constant allocation of administrative tasks between staff on 'stand-by' and the rotation of shifts.

•         A claim of bullying and harassment in relation to treatment by your employer which you ensued after raising your concerns and grievances with your superiors.

On DD MM 20XX, you and your employer entered into an out of court settlement documented in a deed of release following mediation meetings that were conducted.

On DD MM 20XX, your employer reported an income statement to the Australian Taxation Office showing your gross ordinary time earnings of $XX. PAYGW of $XX and Superannuation Guarantee of $XX.

Following this, you questioned your former employer's characterisation of the payment as income or ordinary time earnings and further requested that if the payment was appropriately characterised as ordinary time earnings, then payment of the appropriate superannuation guarantee amount should be made to your superannuation fund.

You received your lump sum in the 20XX-20XX financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 82-135

Superannuation Guarantee (Administration) Act 1992

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Reasons for decision

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

(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 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)          A death benefit termination payment is an employment termination payment which subparagraph (1)(a)(ii) applies.

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

(a)           you are covered by a determination under subsection (5) or (7); or

(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)

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: eligible 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:

•         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.

•         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:

•         The Federal Court in Dibb v. FC of T (2003) 53 ATR 290 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 claims against his former employer, including in respect of underpayment of their entitlements.

The taxpayer and the former employer agreed to settle the claims made against the former employer with the acceptance of the Compensation Payment and the taxpayer.

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 Settlement Agreement would not have been paid.

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 Settlement Agreement are interwoven and intertwined with termination of employment.

Therefore, it is considered that the settlement payment was received by the taxpayer in consequence of the termination of employment, as per section 82-130(1)(a) of the ITAA 1997.

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

Other relevant information:

The Superannuation Guarantee (Administration) Act 1992 requires that an employer must provide the required minimum level of superannuation support each quarter for its eligible employees on salary and wages.

The ordinary meaning of the term 'salary or wages' is remuneration paid to employees for their services as employees. In most practical situations, it is straight-forward to determine whether any given payment made in an employment context is salary or wages.

However, the term is not limited to fixed payments made periodically for work performed, such as a worker's fortnightly pay cheque. It extends to certain lump sum payments, bonuses and allowances that are part of the worker's remuneration.

Payments to an employee which are not given as a reward for their services are not included in 'salary or wages'.

As the payment received by the taxpayer is not given as a reward for their services, it is not considered as salary and wages, therefore superannuation guarantee is not considered to be payable on the amount.