Edited version of private advice

Authorisation Number: 1052315970488

Date of advice: 12 November 2024

Ruling

Subject: Employment termination payment

Question 1

Is the Payment received by the Taxpayer from the Employer, in settlement of an alleged unfair dismissal an employment termination payment (ETP) under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, the Payment received by the Taxpayer is an ETP under section 82-130 of the ITAA 1997.

Question 2

Does the capital gains tax (CGT) exemption for compensation and damages apply to the Payment under section 118-37 of the ITAA 1997?

Answer

No, the CGT exemption under section 118-37 of the ITAA 1997 does not apply to the Payment.

This ruling applies for the following period:

30 June 2024

Relevant facts and circumstances

The Taxpayer was employed by the Employer for several years.

Following the termination of the Taxpayer's employment, the Taxpayer and the Employer entered the Deed to settle the alleged unfair dismissal. The Deed provides that within X days of signing of the Deed, the Taxpayer will be paid the settlement payment of $X, characterised as general damages for pain and suffering.

By entering the Deed and complying with the clauses of the Deed, the Taxpayer released the Employer from all claims, suits, demands, actions or proceedings arising out of the Taxpayer's employment with the Employer, including but not limited to the cessation of the employment.

A few days after singing of the Deed, the Taxpayer received the Payment from the Employer.

A document issued by the Employer shows the Payment was reported as an ETP with nil tax withheld.

A medical certificate was provided, which supports that the Taxpayer attended the clinic towards the end of the employment period, in which the Taxpayer raised significant stress that they had been suffering during that week due to a situation involving their employment.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 82-130(1)

Income Tax Assessment Act 1997 section 82-135

Income Tax Assessment Act 1997 section 82-135(i)

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 118-A

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 section 118-22

Income Tax Assessment Act 1997 section 118-37

Reasons for decision

Question 1

Is the Payment received by the Taxpayer from the Employer, in settlement of an alleged unfair dismissal an employment termination payment (ETP) under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The Payment received by the Taxpayer is an ETP under section 82-130 of the ITAA 1997.

Detailed reasoning

By virtue of subsection 995-1(1) of ITAA 1997, employment termination payments are defined in subsection 82-130(1) of the ITAA 1997, which states that 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.

To determine if a payment is an employment termination payment (ETP), all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied.

Paid as 'in consequence of' the termination of employment

Taxation Ruling IT 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' explains that 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.

In this case, the Deed was entered as a result of the termination of employment while the Payment was made as a consequence of the terms in the Deed. The Payment was therefore considered made 'follows as an effect or result of' the termination. This requirement is considered satisfied.

Payment received no later than 12 months after termination

As the Payment was received within a few months following the termination of employment, this requirement is considered satisfied.

Payment is not a payment mentioned under section 82-135 of the ITAA 1997

Section 82-135 of the ITAA 1997 lists specific payments that are excluded as ETP. Based on the information provided, we found it is necessary to consider subsection 82-135(i), which provides that the following payment is not an ETP:

(i) a capital payment for, or in respect of, personal injury to you so far as the payment is reasonable having regard to the nature of the personal injury and its likely effect on your capacity to derive income from personal exertion (within the meaning of the definition of income derived from personal exertion in subsection 6(1) of the Income Tax Assessment Act 1936);

The expression "personal injury" in subsection 82-135(i) is not defined in the legislation. However, a view has been established that it is limited to physical or mental injury, and does not include emotional hurt (Graham v Robinson [1992] 1 VR 279, per Smith J at 281; Case 20/97 97 ATC 258).

In Graham v. Robinson [1992] 1 VR 279 (Graham v. Robinson), the Court decided if emotional hurt (i.e. hurt, distress, public scandal, hatred, odium, ridicule and contempt) was a personal injury. At 281, Justice Smith stated:

In the absence of express authority, I have come to the conclusion that the expression personal injury does not extend beyond physical injury and mental illness to include emotional hurt. I am encouraged to this view by the fact that the law has rejected grief or sorrow as a form of injury which can be relied on to mount a claim in negligence: Mount Isa Mines Ltd. v. Pusey (1970) 125 CLR 383, at p. 394 and Jaensch v. Coffey (1984) 155 CLR 549, at p. 587. It is true that damages are awarded for pain and suffering in the typical personal injury case. They are awarded, however, where pain and suffering flow from and are connected with physical or mental injury and may therefore be said to be damages in respect of personal injury.

In this case, we considered:

•         while the Deed characterised the Payment as 'general damages for pain and suffering' and the medical certificate supports that the Taxpayer raised significant 'stress' that they had been suffering, we do not find any of the document refers to or gives admission to personal or mental injury. We are inclined to believe that the terms, 'pain and suffering' and 'stress', may be characterised as 'emotional hurt' or 'distress'; but as discussed above, these are not 'personal injury';

•         subsection 82-135(i) of the ITAA further requires that 'the payment is reasonable having regard to the nature of the personal injury and its likely effect on your capacity to derive income from personal exertion'. But in this case, there is no suggestion in relation to 'likely effect on the Taxpayer's capacity to derive income from personal exertion' in the Deed or in any other information provided. As a result, we cannot assess the reasonableness of the Payment to support its exclusion from ETP by subsection 82-135(i) of the ITAA 1997.

Conclusion for ETP definition

We consider that the Payment met all the conditions of ETP definition under subsection 82-130(1) of the ITAA 1997. As a result, the Payment is an ETP.

Question 2

Does the capital gains tax (CGT) exemption for compensation and damages apply to the Payment under section 118-37 of the ITAA 1997?

Summary

The CGT exemption under section 118-37 of the ITAA 1997 does not apply to the Payment.

Detailed reasoning

A CGT event may have occurred when the Taxpayer's right on all claims, suits, demands, actions or proceedings against the Employer being released.

Section 118-20 of the ITAA 1997 reduces a capital gain made from a CGT event to the extent that an amount has already been included in your assessable income. Section 118-22 provides that, in applying section 118-20, you must treat an employment termination payment received as being included in assessable income. As such, any capital gain, if applicable, will be reduced to zero.

Accordingly, where the Payment has been included in the Taxpayer's assessable income as an ETP, no part of it will be assessable under the CGT provisions. Therefore, the CGT exemption under section 118-37 of the ITAA 1997 for compensation or damages does not apply.