Private ruling: Settlement payment
Published: February 2013
Ruling period: 1 July 2012 to 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: 1. Is the amount (the payment) of the settlement sum to be made under a Deed of Settlement and Release an employment termination payment? 2. Is the payment subject to Capital Gains Tax? 3. Does the employer have an obligation to withhold tax from the payment? Advice/Answers: 1. No. 2. No. 3. No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-130. | Income Tax Assessment Act 1997 Subsection 82-130(1). | Income Tax Assessment Act 1997 Paragraph 82-130(1)(a). | Income Tax Assessment Act 1997 Subsection 6-5(2). | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Subsection 6-15(1). | Income Tax Assessment Act 1997 Section 82-135. | Income Tax Assessment Act 1997 Paragraph 108-5(1)(b). | Income Tax Assessment Act 1997 Section 104-25. | Income Tax Assessment Act 1997 Section 118-37 | Income Tax Assessment Act 1936 Subsection 160ZB(1) | Taxation Administration Act 1953 Section 10-5 | Taxation Administration Act 1953 Section 12-1

Reasons for decision: Summary: The payment is not an employment termination payment. | Detailed Reasoning - Employment termination payment: An employment termination payment, where the payment is made during the life of a taxpayer, is known as a life benefit termination payment (subsection 82-130(2) of the Income Tax Assessment Act 1997 (ITAA 1997)). Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states: employment termination payment has the meaning given by section 82-130. Subsection 82-130(1) of the ITAA 1997 states: 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 the termination (but see subsection (4)); and (c) it is not a payment mentioned in section 82-135. All these requirements need to be satisfied in order for a payment to be treated as an employment termination payment. Failure to satisfy any of these requirements will result in a payment not being considered an employment termination payment. | Detailed Reasoning - Payment is made in consequence of the termination of employment: The first condition to be met is that there must be an employment termination payment that 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 phrase 'in consequence of termination of employment' has been interpreted by the courts in several cases. Of note are the decisions made by the High Court in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; 75 ATC 4213; (1975) 133 CLR 45 ( Reseck ) and the Full Federal Court in McIntosh v. Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; 79 ATC 4325 ( McIntosh ). Both Courts views were that for a payment to be made in consequence of the termination of employment it had to follow on as a result or effect of the termination of employment. Additionally, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient. In light of these decisions, the Commissioner discusses the meaning of the phrase 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). In paragraph 5 of TR 2003/13 the Commissioner states: … 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. As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be: … 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. Therefore, if the payment follows as an effect or a result of the termination of employment, the payment will be made 'in consequence of' the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. Hence, the payment will be an employment termination payment unless one of the other criteria is not satisfied. In paragraph 32 of TR 2003/13, the Commissioner considers a payment is in consequence of the termination of employment where there are a number of reasons for a dispute, and subsequent settlement, between an employee and their former employer, one of which was the termination of employment. The paragraph states: The Federal Court in Raymond Joseph Dibb v. FC of T 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. In the case in question, the taxpayer was employed by a company (the Company) more than 5 years ago. In the relevant income year, the taxpayer is seeking damages from the Company for non-economic loss for damage to professional reputation and career, humiliation, stress, pain, suffering and depression; and dislocation of life and adverse effect on family. The Company is proposing to settle the matter with a Settlement and Release Deed (the Deed) and paying among other amounts, an amount (settlement sum) for non-economic loss suffered by the taxpayer due to alleged harassment while employed. In accordance with paragraphs 5 and 6 TR 2003/13, a payment is made in consequence of termination of employment if the payment would not have been made but for the termination of employment. Further, a causal connection between the termination and the payment is required and termination need not be the dominant cause of the payment. In the present case, the dominant cause of the payment is to settle the dispute between the Company and the taxpayer regarding the harassment the taxpayer suffered when employed. However, the Deed clearly states that the amount is for harassment. The taxpayer claims that the taxpayer suffered harassment in earlier years which occurred before the taxpayer's termination of employment. Therefore the taxpayer could have made the claim even while the taxpayer was employed. Had the taxpayer made the claim for harassment while the taxpayer was still employed the taxpayer would have received the payment while continuing employment with the Company. Further, the taxpayer had terminated their employment almost 5 years ago and had received a redundancy payment at that time. Therefore the nexus with the termination of employment and the payment that will be made on signing the Deed is too remote for the payment to be considered an employment termination payment. There is a temporal sequence regarding the payment, that is, the payment followed the taxpayer's termination of employment. However, it cannot be said that but for the termination of employment the payment would not have been made. Therefore the requirement under subparagraph 82-130(1)(a) of the ITAA 1997 has not been met and the payment is not in consequence of the termination of employment. Accordingly the remaining requirements of section 82-130 of the ITAA 1997 do not need to be considered. | Summary: The payment is exempt from capital gains tax. | Detailed Reasoning - Capital gains tax: Paragraph 108-5(1)(b) of the ITAA 1997 specifically includes a legal or equitable right within the definition of a Capital Gains Tax (CGT) asset. The right to seek compensation is therefore a CGT asset. CGT event C2 (section 104-25 of the ITAA 1997) happens to the asset when the ownership of an intangible CGT asset (such as a right) ends by the asset being satisfied or surrendered. Taxation Ruling TR 95/35 titled ' Income tax: capital gains: treatment of compensation receipts' (TR 95/35) considers the operation of the income tax laws to a compensation payment and states that settlement of a personal injuries claim represents the disposal of an asset, as the taxpayer has disposed of the right to seek compensation for the injury suffered. However, there are certain exemptions that may allow you to reduce or disregard a capital gain or capital loss. TR 95/35 states, at paragraphs 19 and 20, that compensation received by an individual for any wrong or injury suffered to his or her person or in his or her profession or vocation is exempt from CGT under subsection 160ZB(1) of the Income Tax Assessment Act 1936 , and that the exemption is available if the taxpayer receives compensation in an undissected lump sum which relates wholly to the personal wrong or injury suffered by the taxpayer. The above exemption is now contained in subsection 118-37(1) of the ITAA 1997. A capital gain or capital loss you make from a CGT event is disregarded where the amount you receive relates to compensation or damages for any wrong or injury you suffer in your occupation (at paragraph 118-37(1)(a)), or where the amount you receive relates to compensation or damages for any wrong, injury or illness you suffer personally (at paragraph 118-37(1)(b)). In addition, Taxation Ruling IT 2424 titled 'Income Tax: compensation payments in respect of unlawful acts of discrimination' (IT 2424) provides guidelines about the income tax treatment of compensation payments in respect of unlawful acts of discrimination. The Ruling includes some examples of discrimination and payments of compensation to illustrate the operation of the income tax law to such payments. IT 2424 discusses, at paragraph 8, and also in the example at paragraphs 13 and 14 (about cases of sexual harassment), that a payment to compensate for personal injury, injury such as psychological and emotional injury, injury to feelings, humiliation, embarrassment, depression, anxiety, etc. is not liable to income tax as it is a payment of a capital nature. The ruling goes on to state that such a payment is exempt from capital gains tax. In this case, the facts indicate that the payment the taxpayer will receive from the Company will be made to the taxpayer in the form of a capital payment as a lump sum. The Deed specifically mentions that the payment is being made for the non-economic loss allegedly suffered by the taxpayer as a result of marginalisation and harassment. We have taken into account that the payment was a settlement amount in respect of the taxpayer's claims concerning marginalisation and harassment the taxpayer alleged the taxpayer suffered at work to conclude that the payment was made to compensate the taxpayer for the taxpayer's pain and suffering caused by marginalisation and harassment at the taxpayer's workplace. Therefore, it is considered that the lump sum payment is a capital receipt and that the payment has the character of a compensation payment received for a wrong or injury the taxpayer suffered in the taxpayer's occupation. Consequently, the lump sum payment is not taxable as it is exempt from CGT under paragraph 118-37(1)(a) of the ITAA 1997. | Summary: No tax needs to be withheld from the payment by the payer. | Detailed Reasoning - Pay As You Go (PAYG) withholding: Under the Taxation Administration Act 1953 (TAA) , the Pay As You Go (PAYG) system requires that the payer of certain kinds of payments must withhold an amount from the payment and pay it to the Commissioner of Taxation. There is no requirement to withhold an amount if the payment is exempt income or is not assessable income of the payee under section 12-1 of the TAA. As discussed above, the payment to be received by your client is not assessable. As a result the PAYG withholding obligations will not arise.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | The taxpayer commenced employment with an employer (the Company) in a particular role. | Soon after the taxpayer was also appointed in another role. | Some years later it was resolved to conduct a review of the Company's dealings. Subsequently it was decided that the audit be conducted by the parent entity audit department. | Then as part of a restructure some of the taxpayer's responsibilities were transferred into a new specialist role. | The taxpayer raised concerns about the taxpayer's performance review which the taxpayer found unsatisfactory. The taxpayer also alleged a stressful working relationship between the taxpayer and certain members of the Company. | On account of the above and the restructuring the taxpayer stated in an email to the Chairman of the Company that the taxpayer had decided not to continue at the Company. The taxpayer's employment terminated when the taxpayer accepted a redundancy package. | The taxpayer secured a position with another organisation. | The taxpayer provided a detailed statement to an investigating body in connection with its investigation into the Company and other companies and employees of those companies. | Some years after terminating their employment with the employer, the taxpayer's solicitors wrote to the parent body, stating that the taxpayer was legally entitled to compensation. | The taxpayer's solicitors sought damages relating to economic loss for lost earnings through to normal retirement age and for non-economic loss damage to professional reputation and career, humiliation, stress, pain, suffering and depression and dislocation of life and adverse effect on family. | A mediation proceeded between the taxpayer and the company with a mediator. As a result the Company is proposing to pay the taxpayer a settlement sum. In accordance with the Deed the Company would pay an amount for alleged marginalisation and harassment the taxpayer suffered before the taxpayer had terminated their employment. This amount (the payment ) is the subject of the private ruling. | A paragraph in Recitals in the Deed states that the parties have agreed to settle the claims without admission of liability and that the Company and the parent entity deny allegations made by the taxpayer. | Further the Deed defines the term 'Claims' and this includes injuries, harassment and victimisation suffered by the taxpayer relating to his employment and claims arising out of the taxpayer's employment and it's termination.