Edited version of private advice

Authorisation Number: 1052378625020

Date of advice: 7 May 2025

Ruling

Subject: Employment Termination Payment

Question 1

Is the payment made to you under the Settlement Agreement assessable as an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

This ruling applies for the following period

Year ended 30 June 20XX

Relevant facts and circumstances

You were employed by the Employer.

There was a dispute between you and the Employer for matters relating to multiple issues in your employment.

You made a claim for damages, loss and detriment.

A Settlement Agreement (Agreement) was signed by you and the Employer. Without admission of liability, the parties entered into the Agreement for the purpose of resolving all matters in dispute arising out of or in connection with the proceedings.

As per the terms of the Agreement, you terminated your employment and the Employer made a settlement payment to you.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 82-135

We followed these ATO view documents

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'.

Reasons for decision

Employment termination payment

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

Subsection 82-130(1) of the ITAA 1997 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.

For the payment made to you under the Agreement to constitute an ETP, all the conditions in section 82-130 of the ITAA 1997 will need to be satisfied.

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 are 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).

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 received 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:

32. 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 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 is a dispute between you and the Employer for all claims and matters relating to multiple issues in your employment.

You and the Employer agreed to settle the claim and your differences under the terms of the Agreement. Your settlement payment is to extinguish all claims and all matters relating to you.

You agreed to end your employment with the Employer and the Employer agreed to make the payment within fourteen days of receipt of your resignation letter.

While the settlement agreement is a direct cause of the payment, the payment would not have been made unless there was a termination of your employment. That is, there was a sequence of events leading to the termination which had a relationship and connection, which ultimately led to the settlement payment. The various causes of action to be settled by the Agreement are interwoven and intertwined with termination of employment.

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

Payment received more than 12 months after termination

Paragraph 82-130(1)(b) of the ITAA 1997 requires that the payment must be received no later than 12 months after the termination of employment.

Your employment effectively terminated during the 20XX income year. The payment was made to you within 12 months of the termination of your employment, therefore satisfying the second condition under paragraph 82-130(1)(b) of the ITAA 1997.

Not a payment mentioned in section 82-135 of the ITAA 1997

Paragraph 82-130(1)(c) of the ITAA 1997 specifies that an ETP does not include a payment mentioned in section 82-135 of the ITAA 1997. An exclusion under paragraph 82-135(i) of the ITAA 1997 includes a capital payment for personal injury as compensation for your inability to be employed.

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 in Scully was held not to be in respect of personal injury. Acting Chief Justice Gaudron and Justices McHugh, Gummow and Callinan stated in their joint decision:

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.

Using the principles in Scully, for an amount to meet the requirements of paragraph 82-135(i) of the ITAA 1997, a payment must be for, or in respect of, personal injury and be calculated by reference to the nature and extent of the injury or likely loss to the taxpayer.

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.

In Re Luke and Federal Commissioner of Taxation [2011] AATA 801; (2011) 2011 ATC 10-216; the AAT accepted that the taxpayer had been adversely affected by what they perceived to be unreasonable harassment and discrimination in their employment, but said that 'personal injury' does not extend 'beyond physical injury and mental illness to include emotional hurt'. The AAT added that:

Evidence is required that the payment had some form of identifiable and unambiguous connection with a personal injury, for which compensation was necessary as a reflection of the fact that the applicant's capacity to derive income from personal exertion had been impaired.

In view of the above, a physical and/or mental injury would require diagnosis by a qualified medical practitioner to fall within the meaning of 'personal injury'. The payment must also be calculated by reference to the nature of the injury and the extent to which the injury will affect your capacity to derive income from employment.

Although the settlement payment relates to your claim for health, age and discrimination, the key fact is it was received for the execution of the Agreement and for not pursuing your Employer for damages. The Employer has denied any liability to the allegations and you have released them from all claims relating to the matter. The Agreement does not provide any medical qualification or clarification that the payment was calculated with regard to your likely loss of income producing capacity.

Therefore, in accordance with paragraph 82-130(1)(c) of the ITAA 1997, the Payment is not for, or in respect of, personal injury, which would be excluded from being an ETP under section 82-135.

Conclusion

The payment received by you from the Employer is an employment termination payment in accordance with section 82-130 of the ITAA 1997.

[1] (2003) 53 ATR 290