Edited version of private advice

Authorisation Number: 1052326228024

Date of advice: 8 November 2024

Ruling

Subject: Employment termination payment

Question

Is the payment of $XX,XXX (the Payment) received by you in accordance with the Deed of release (the Deed) an ETP under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Income year ending 30 June 20XX

Relevant facts and circumstances

According to the Deed, you commenced employment with XXXXXXX (the Company) on XX XX XXXX, and your employment with the Company terminated on XX XX XXXX.

A 'Statement of Service' from the Company, dated XX XX XXXX, says that you were employed for the period XX XX XXXX to XX XX XXXX '(following her resignation)'.

The Deed states that you applied to the Fair Work Commission in case number XXXXXXX, alleging a contravention of the general protections provisions of the Fair Work Act 2009 (Cth).

The Deed refers to a sum of $XX,XXX to be paid to you by the Company, within seven days of receipt by them of a copy signed by you. The Deed states that the payment will be comprised of:

•         $X,XXX as reimbursement of legal fees; and

•         $XX,XXX as general damages.

On XX XX XXXX, the Company reported a payment being made to you as follows:

•         Employment commencement date: XX XX XXXX

•         Employment cessation date: XX XX XXXX

•         Employment cessation type: Employer Initiated - Dismissal

•         Income type: Salary and wages

•         Employment termination payment type: O

•         Payee ETP payment date: XX XX XXXX

•         Payee total ETP PAYGW amount: XXXX

•         Payee ETP tax free component: 0

•         Payee ETP taxable component: XXXX

•         Income type: Salary and wages

•         Employment termination payment type: O

•         Payee ETP payment date: XX XX XXXX

•         Payee total ETP PAYGW amount: 0

•         Payee ETP tax free component: 0

•         Payee ETP taxable component: XXXXX.

On XX XXXX, the Company amended their reporting as below:

Form Transaction Id: XXXXXXX

Received date: XX XX XXXX

Employment commencement date: XX XX XXXX

Employment cessation date: XX XX XXXX

Employment cessation type: Employer Initiated - Dismissal

Employee Termination Payment Items

Income type: Salary and wages

Employment termination payment type: O

Payee ETP payment date: XX XX XXXX

Payee total ETP PAYGW amount: XXXX

Payee ETP tax free component: 0

Payee ETP taxable component: XXXXX

Income type: Salary and wages

Employment termination payment type: X

Payee ETP payment date: XX XX XXXX

Payee total ETP PAYGW amount: 0

Payee ETP tax free component: 0

Payee ETP taxable component: XXXX

On XX XX XXXX, the Company again amended their reporting as follows:

Form Transaction Id: XXXX

Received date: XX XX XXXX

Employment commencement date: XX XX XXXX

Employment cessation date: XX XX XXXX

Employment cessation type: Employer Initiated - Transfer

Employee Termination Payment Items

Income type: Salary and wages

Employment termination payment type: X

Payee ETP payment date: XX XX XXXX

Payee total ETP PAYGW amount: XXXX

Payee ETP tax free component: 0

Payee ETP taxable component: XXXX

On XX XX XXXX, XXXXXXXX, Group Manager Employee & Industrial Relations for the Company, sent you an email in reply to an email from you on the same date. The email stated:

•         The Settlement Sum reflected in the Deed of Settlement was for reimbursement of legal fees and general damages. These amounts were not payments for ordinary income and as such are not reportable on a payment summary.

•         Reference to termination on the group certificate reflects that the employment has ceased. It does not reflect a reason for that cessation.

•         As such, the Company considers that the revised Group Certificate/Income Statement has been appropriately corrected and no further amendments or changes will be contemplated.

Reasons for decision

This is to explain how we reached our decision. This is not part of the private ruling.

Detailed reasoning

Employment termination payments

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. Failure to satisfy any of the conditions under subsection 82-130(1) will result in the payment not being considered an employment termination payment.

Paid as a 'consequence of' the termination of your employment

For a payment to be treated as an ETP, the first condition that must be met is that the payment is made in 'consequence of' the termination of employment of the taxpayer.

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 court's decisions on the meaning of the phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test is set out in Taxation Ruling TR 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).

While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner.

In paragraph 5 of TR 2003/13 the Commissioner states:

... 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.

Clause X.X(x) of the Deed states:

In consideration of the Payment, the Employee agrees that:

the Payment includes the full amount owed to them by the Company, whether for salary or other remuneration, leave entitlements, notice of termination, or anything else connected with the Employment or the Termination, save for the exceptions in clause X.X of this Deed;'

The Deed also states that it was agreed to 'resolve all matters...on the terms set out in this Deed'.

In other words, but for the termination, you would not have received the Payment under the Deed of Release. Therefore, it is considered that the termination payment was received by you in consequence of the termination of your employment.

Payment is received no later than 12 months after termination

The Deed states your employment ended with the Company on XX XX XXXX. According to the reporting of the Company, the Payment was made either on XX XX XXXX or XX XX XXXX.

The (unsigned, by you) Deed does not provide an exact date for its application, stating only 'This deed is made on (blank) (month) XXXX'.

As the Deed refers to the Payment being payable to you within seven days of receipt by them of a signed (by you) copy of the Deed, it seems that the XXXXXXXX date is more likely.

You also stated via phone on XX XX XXXX that the payment was received on XX XX XXXX.

It seems the XXXXXXX payment date is more likely. Regardless, both dates are within 12 months of the date of termination of employment. As such, this condition has been satisfied.

Payment is not a payment mentioned in 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.

Under subsection 82-130(1) of the ITAA 1997, consideration must be given to whether the specific exemption for personal injury in paragraph 82-135(i) (payments that are not employment termination payments) applies. This subsection states that employment termination payments do not include:

(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);

This exclusion is for a payment or benefit that compensates or reimburses a person for, or in respect of, the particular injury. This requires there to be a relationship between the injury and the payment.

In Commissioner of Taxation (Cth) v. Scully (2000) 201 CLR 148; [2000] HCA 6; (2000) 2000 ATC 4111; (2000) 43 ATR 718, the High Court held that compensation must be calculated by reference to the nature and extent of the injury or likely loss to the taxpayer. The payment in this case was not in respect of personal injury, acting Chief Justice Gaudron and Justices McHugh, Gummow and Callinan stating in their joint decision:

However, the payment in this case cannot be said to be compensation for or in respect of the personal injury. Clauses 2.4.1 and 3.5.1, pursuant to which the respondent's payment was calculated, make no attempt to place a monetary value on a member's injury. They do not even provide a formula, roughly comparable to the manner in which a court or tribunal might assess damages in a claim for personal injury, to quantify the amount of the payment. Indeed, the very similarity of benefits for death, retirement, resignation, retrenchment and dismissal to those for total and personal disablement deny that the purpose of a payment pursuant to clauses 2.4.1 and 3.5.1 is concerned with the value of any injury sustained by an employee.

...

In our opinion, the payment in this case cannot be characterised as consideration... in respect of, personal injury. The fact that the payment is not calculated by reference to the nature and extent of the injury or likely loss to the respondent and the fact that the other benefits are similar to that for total and permanent disablement point inevitably to the conclusion that the payment was consideration... for, or in respect of the respondent's termination of employment and her rights under the Trust Deed and was not consideration... for, or in respect of her injury.

In the Administrative Appeals Tribunal (AAT) decision AAT Case 11,722 (1997) 35 ATR 1114; (1997) 97 ATC 258, a taxpayer negotiated a settlement with their past employer by agreeing to be paid a certain amount, also to forgo all past, present and future claims against the employer, except for personal injury. Senior Member Dwyer ruled that, given the 'exception' in the settlement clause, no amount of the settlement could be for personal injury. Therefore, the ETP exclusion provisions could not apply to the amount.

There are three types of injury that a person can receive:

(a)  behavioural injury - one that involves physical injury (internal and/or external) and/or mental illness that is clearly discernible to a qualified medical practitioner;

(b)  non-behavioural injury - hurt, distress, anxiety, etc., that flows from the death of, or serious injury to, a relative or close friend; wrongful dismissal; defamation; etc. This type of injury may have legal remedies under the law of torts (e.g., defamation, slander), statute (e.g., sexual harassment, discrimination), or contract (e.g., employment, professional negligence); and

(c)   property injury - damage to a person's property.

While all three types of injury may be considered personal, it is considered that only the first type (behavioural injury) falls within the meaning of the term 'personal injury'.

The reasoning above is based on the decision by the Victorian Supreme Court in Graham v. Robinson [1992] 1 VR 279 (Graham v. Robinson), where the Court had to decide if emotional hurt (ie. 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.

The decision in Graham v. Robinson was applied in the AAT decision McMahon v. Commissioner of Taxation Case [1999] AATA 5; (1999) 41 ATR 1056; (1999) 99 ATC 2025 (McMahon) in relation to a payment for alleged damage to a taxpayer's reputation. In McMahon, a critical performance appraisal of the taxpayer and other comments were published in the media. Subsequent to this, the taxpayer's employment was terminated and it was agreed to pay him certain amounts including an amount for the alleged damage to his reputation. Senior Member Block stated:

The Tribunal also notes the stipulation in the concluding portion of s. 27A(1)(n) of the Act that the amount of consideration for personal injury is to be regarded as an ETP only to the extent that it is reasonable having regard to the nature of the injury and the taxpayer's capacity to derive income from personal exertion. The Tribunal considers that the inclusion by the legislature of the words "from personal exertion" tends to confirm that the section is intended to exclude from the definition of ETP payments in respect of injuries to the person, where such injuries being physical injuries or mental illnesses which have an assessable and identifiable impact on the capacity of the taxpayer to earn income. The Tribunal considers in summary that an injury to person is distinguishable from an injury to a person's reputation.

For the Reasons set out previously, (and bearing in mind that the decision in Graham v. Robinson is binding on the Tribunal), the reputation payment was not made in respect of personal injury within s. 27A(1)(n) of the Act which does not operate to exclude it from the provisions of s. 27A of the Act; accordingly the reputation payment was correctly assessable as an ETP.

Applying the principles in the above cases, the payment must be for or in respect of personal injury and must be calculated both by reference to the nature and extent of the injury and the likely loss of income to the taxpayer, in order to meet the requirements of paragraph 82-135(i) of the ITAA 1997.

The Deed makes no reference to any injury being suffered by you. The Payment has not been calculated with any reference to the nature and extent of any injury, nor with any reference to any subsequent likely loss of income.

Therefore, it cannot be a capital payment for, or in respect of, personal injury, pursuant to paragraph 82-135(i) of the ITAA 1997.

None of the other exclusions in section 82-135 of the ITAA 1997 apply to the Payment, to exclude it from being an ETP. Therefore, the third condition in paragraph 82-130(1)(c) has been satisfied. Accordingly, as all of the conditions under subsection 82-130(1) have been satisfied, the Payment is an ETP.