Private ruling: Employment termination payments
Date of advice: 5 August 2019
Published: October 2019
Ruling period: Income year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is any part of a medical redemption payment (the Redemption Payment) received by a person (the Taxpayer) an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will the amount or any portion thereof to be paid pursuant to section 33 and paragraph 54(1)(a) of the Return to Work Act 2014 (SA), be included in your assessable income? | A2: No

Relevant facts and circumstances: The Taxpayer commenced employment with an entity (the Employer) in 20XX. In 20XX, during the course of their employment, the Taxpayer suffered an injury to their body. The Taxpayer lodged a claim (the Claim) with the South Australian Employment Tribunal (the Tribunal). In a Settlement and Release Agreement (the Agreement), the parties agreed that, provided that the Taxpayer provided a letter of resignation, the parties would settle the matter on certain terms, including the following. The Tribunal made Orders with the consent of the parties, including the following: · The applicant's claim for injury is accepted as a compensable injury; · The applicant is entitled to reimbursement of reasonably incurred medical and like expenses in respect to such injury. Shortly afterwards, the Taxpayer terminated their employment with the Employer. The Taxpayer received a payment under a 'Redemption of Medical Expenses' Agreement (the Payment).

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 15-30 | Income Tax Assessment Act 1997 Section 118-37 | Income Tax Assessment Act 1997 section 82-130

Reasons for decision: Summary: The Redemption Payment is not an ETP in accordance with section 82-130 of the ITAA 1997. | Detailed Reasoning - Employment termination payments: Division 82 of the ITAA 1997 sets out how ETP are treated for income tax purposes. In accordance with section 82-130 of the ITAA 1997, a payment is an ETP 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. | Detailed Reasoning - In consequence of 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. Whilst the courts have divergent views on the meaning of this 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) . While TR 2003/13 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect 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 paragraphs 5 and 6 of TR 2003/13 the Commissioner states: 5.... 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 received in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case. In this instance, the Redemption Payment is being made pursuant to section 33 of the Return to Work Act 2014 (SA) (RWA). Under subsection 33(1) of the Return to Work Act 2014 SA (RWA 14) a worker is entitled to be compensated for the costs of services described in subsection (2) that are reasonably incurred by the worker in consequence of having suffered a work injury. Subsection (2) states that the costs referred to in subsection (1) include the following: a. medical services; b. hospitalisation and all associated medical, surgical and nursing services; and c. approved recovery/return to work services. The 'Redemption of Medical Expenses' Agreement between the Taxpayer and the Employer outlines the terms on which the Redemption Payment is to be made. Under clause 8, the Taxpayer and the Employer agree that the Employer's undischarged liability to pay compensation for medical and other expenses of the kind referred to in section 33 of the RWA be redeemed by a capital payment amount. The Redemption Payment is to be made in consequence of the Taxpayer having suffered a workplace injury and not in consequence of the termination of the Taxpayer's employment. Therefore, it cannot be said that but for the termination of the Taxpayer's employment, the payment would not have been made. There is a separate termination agreement that outlines the payment that the Taxpayer is entitled to receive in consequence of the termination of their employment. Consequently, there is no connection between the Redemption Payment and the termination of the Taxpayer's employment. | Detailed Reasoning - Question 2: Reasons for decision Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) deals with receipts of ordinary income. It does not operate to include in assessable income amounts of a capital nature. The money to be received will be capital in nature and therefore not assessable income. Additionally, as the criteria in subsection 82-135(i) of the ITAA 1997 is satisfied the payment is excluded from being an Eligible Termination Payment. The other applicable sections, section 15-30 of the ITAA 1997 and the capital gains tax provisions of the ITAA 1997, also will not operate to make the payment assessable. Therefore the payment you receive will not be included in your assessable income.