Edited version of private advice

Authorisation Number: 1052272677046

Date of advice: 12 July 2024

Ruling

Subject: Assessable income - employment termination payment

Question

Is the lump sum payment (the Payment) by Organisation X to the Taxpayer under the terms of the Agreement subject to taxation as an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. The payment to taxpayer is an employment termination payment.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

I July 20XX

Relevant facts and circumstances

The Taxpayer suffered personal injuries while employed with Organisation X.

The Taxpayer has been unable to perform any work since Date 1.

During the following year the Taxpayer was deemed to be Totally and Permanently Disabled by their Superannuation Fund.

The Taxpayer currently receives an amount per annum as income compensation in relation to Organisation X's liability.

The Taxpayer's retirement age is 67 years of age, which will occur after the ruling period.

The Taxpayer entered into a Lump Sum Agreement (the Agreement) to extinguish their rights with Organisation X (the Employer) several years after they were injured which outlines:

•         That the Employer's undischarged liabilities to pay income compensation and medical and /or related expense compensation be extinguished by a lump-sum payment to the eligible employee of a specified amount (the Payment), which is inclusive of interest and on the basis that the relevant taxation will be forwarded to the Commissioner for Taxation prior to payment)

•         The Payment comprised of a gross amount to extinguish the undischarged liability for income compensation and an amount to extinguish the undischarged liability for medical and /or related expenses.

•         The eligible employee agrees to meet any additional taxation liability arising out of the lump-sum payment and agrees that any dispute about taxation will be a matter wholly between the eligible employee and the Commissioner for Taxation; and

•         The eligible employee agrees to resign from their employment on and from a specified date, being Date 2.

The Payment is scheduled to be paid to the Taxpayer on during the ruling period.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 paragraph 82-130(1)(a)

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 subsection 82-150(2)

Reasons for decision

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. ...

(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)

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.

Invalidity payments

An invalidity payment is part of an ETP your employer gives. It is made up of a taxable component and a tax-free component. The invalidity payment is part of the tax-free component of the ETP.

An employment termination payment includes an invalidity segment if:

a)    The payment was made to a person because he or she stops being gainfully employed; and

b)    The person stopped being gainfully employed because he or she suffered from ill-health (whether physical or mental); and

c)    The gainful employment stopped before the person's last retirement day; and

d)    2 legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the person can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience, or training.

Under subsection 82-150(2) of the ITAA 1997.

The invalidity segment of the ETP represents the time between the day employment stopped and the day the employee would have retired. It's worked out using the formula below:

Amount of ETP × days to retirement ÷ (employment days + days to retirement)

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).

1.    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.

2.    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 T¹ 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 Employer in respect of personal injury Claims.

The Taxpayer and the Employer agreed to settle the claims made against the Employer with the acceptance of the Compensation Payment and the Taxpayer would terminate employment with Organisation X.

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 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 Payment under the Agreement The causes of action settled under the Agreement are interwoven and intertwined with termination of employment.

Therefore, it is considered that the Payment will be received by the Taxpayer in consequence of the termination of employment, as per paragraph 82-130(1)(a) of the ITAA 1997.

The payment the Taxpayer will receive, the Payment, is an ETP in accordance with section 82-130 of the ITAA 1997 and section 82-150(2) of the ITAA 1997.