Edited version of private advice

Authorisation Number: 1052363533497

Date of advice: 20 February 2025

Ruling

Subject: Lump sum payment

Question 1

Is the lump sum payment of $XXXX that you received from your former employer, Entity A an employment termination payment (ETP) as defined in subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

Question 2

Is the payment you received ordinary income?

Answer 2

Decline to rule.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Your employment with Entity A commenced on XX/XX/20XX.

Your employment was terminated on XX/XX/20XX, by reason of redundancy.

You commenced legal actions against Entity A on XX/XX/20XX and continued until a Deed of Release and Settlement (the Agreement) was reached resulting in a settlement payment being agreed. The dispute was about your claim that Entity A did not comply with their obligations under their enterprise agreement, to make every endeavour to place you in other suitable employment after your substantive position was made redundant.

Clause X of the Agreement provides:

2.             Without departing from their respective positions, and without admitting liability, the Applicant (you) and the Respondent (Entity A) agree to fully and finally settle the matter on the following basis:

Payment

2.1             The Respondent will pay to the Applicant $XXXX, taxed per the applicable law, within 7 (seven) days of the Applicant and the Respondent signing these terms of settlement.

...

You were paid $XXXX from Entity A on XX/XX/20XX following the Agreement.

Your former employer reported the amount to the ATO as an ETP and deducted PAYG withholding of $XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 82-135

Taxation Administration Act 1953 Schedule 1 section 359-35

Reasons for decision

Question 1

Subsection 82-130(1) 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)           ...; 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.

Employment termination payment (ETP)

A payment is an ETP if it satisfies all the above requirements in subsection 82-130(1) of the ITAA 1997 and is not specifically excluded under section 82-135 of the ITAA 1997.

Paid 'in consequence' of the termination of employment

The first consideration is whether the payment is made '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 is set out in Taxation Ruling 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' (TR 2003/13).

Paragraphs 5 and 6 of TR 2003/13 state that:

5.             ...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.

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.

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[1] 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 court 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 you and Entity A.

You agreed to settle the claims made against Entity A by the acceptance of a payment to the sum of $XXXX. Your employment was terminated on XX/XX/20XX and after a sequence of connected events, ultimately led to the payment.

As per paragraphs 5 and 6 of TR 2003/13, it is clear that, but for the termination of your employment, the payment would not have been paid.

While the Agreement resulted in the payment being made, the payment would not have been made unless there had been a termination of employment. That is, there was a sequence of events from the termination of your employment which had a relationship and connection leading to the payment being made.

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

Payment to be received no later than 12 months after termination

Paragraph 82-130(1)(b) of the ITAA 1997 requires the payment to be made within 12 months of termination, with some exceptions.

In this case, our records show that you were paid $XXXX from Entity A on XX/XX/20XX. This payment was made more than 12 months after termination of employment on XX/XX/20XX.

However, subsection 82-130(4) of the ITAA 1997 states that:

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

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

(b)           ...

Subsection 82-130(7) states:

The Commissioner may, by legislative instrument, determine that paragraph (1)(b) does not apply to either or both of the following, as specified in the determination:

(a)           a class of payments;

(b)           a class of recipients of payments.

Commonwealth determination made by James O'Halloran, Deputy Commissioner of Taxation on 28 March 2018 under reference ETP 2018/1 (which is a legislative instrument, as required by subsection 82-130(7)) states that:

paragraph 82-130(1)(b) of the ITAA 1997 does not apply to a late termination payment if the payment is received more than 12 months after the termination of a person's employment because:

(a)           legal action was commenced within 12 months of the termination of employment, of which the subject is either or both:

(i)            the person's entitlement to the payment;

(ii)           the amount of the person's entitlement;

(b)           ...

ETP 2018/1 - Explanatory statement, at paragraph 8 states:

The legal action must have commenced within 12 months of the termination of a person's employment. Legal action is intended to cover any Court, Tribunal and other proceedings of a judicial or quasi-judicial nature which may result in the payment of an amount in consequence of the termination of a person's employment.

In this case, you commenced legal action within 12 months of termination of your employment, which connected your entitlement to the payment. So paragraph 82-130(1)(b) of the ITAA 1997 does not apply to prevent the late termination payment from meeting the definition of an ETP, by the legislative instrument under subsection 82-130(7) of the ITAA 1997.

Exclusions under section 82-135 of the ITAA 1997

Certain payments made on termination of employment are excluded from being an ETP under section 82-135 of the ITAA 1997. Examples of these payments include any accrued annual and long service leave, the tax-free parts of a genuine redundancy payment and an early retirement scheme payment, etc.

In your application, it is contended that 'compensation payment' should be excluded as an ETP. However, we did not find any exclusions under section 82-135 of the ITAA 1997 related to 'compensation'.

As none of the exclusions apply, the payment is not excluded from being an ETP under section 82-135 of the ITAA 1997.

Conclusion:

The $XXXX payment to you on XX/XX/20XX by your former employer Entity A, is an ETP under subsection 82-130(1) of the ITAA 1997.

Question 2

Section 6-25 of the ITAA 1997 states that if an amount is both ordinary income and statutory income then the statutory income provisions prevail over the ordinary income provisions. That is, the amount will only be included in assessable income as statutory income.

In this case, the relevant amount has been determined to be statutory income as an ETP. Therefore, it would make no difference whether or not the amount was considered to be ordinary income as the ETP provisions will prevail.

As there will be no tax consequences if the amount was ordinary income or not, given the amount is taxed as an ETP regardless, it would not be an appropriate use of the Commissioner's resources to decide whether or not the amount is ordinary income. TR 2006/11 Private Rulings states at paragraph 39 that examples of situations where the Commissioner may decline to rule under section 359-35 of Schedule 1 to the Taxation Administration Act 1953 include where ruling on the matter would have no practical consequences for the taxpayer and would be an inappropriate use of the Commissioner's resources. Therefore, we have declined to rule on the question of whether the amount is ordinary income.

[1] (2003) 53 ATR 290