Private ruling: Payment made under a Deed of Release
Published: February 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: 1. Is an out of court settlement to be made under a Deed of Release (the Deed) a superannuation lump sum? 2. Is an out of court settlement to be made under the Deed, considered to be an employment termination payment as defined in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? 3. Is a lump sum payment to be made in respect of compensation assessable in the hands of the recipient? Advice/Answers: 1. No. 2. No. 3. No.

Relevant facts and circumstances: Over 15 years ago, you commenced employment on a fixed term contract with an employer. You were then employed on a number of fixed term contracts before gaining 'continuing employee status' a few years later. You allege that over 15 years ago, you were given incorrect advice by persons in authority regarding your eligibility to join a specific superannuation fund. A few years later, you joined a superannuation fund (the Fund). In the 2011-12 income year, you lodged a claim for compensation to an entity (the Entity). In your claim to the Entity you alleged that you would have received greater superannuation benefits upon retirement than those you actually received but for the incorrect advice regarding your eligibility to join the Fund. In early 2014, you received a letter from a solicitor on behalf of the Entity of an offer to pay you a specified amount in full and final settlement of your claim. The letter included advice from the ATO in relation to the decision made in Cornwell v. Commonwealth (2007) HCA 16 . The advice indicated that you will not have to pay tax on this settlement. The payment is to be made to you by the Entity. In the proposed Deed between the Entity and yourself, both parties agreed to settle the claims under the terms of the Deed. The Deed referred to the settlement sum to be made to you in full and final settlement for damages and nothing for legal costs and expenses and to be made within 28 days of the Deed executed by yourself. Under the terms of the Deed, upon payment of the settlement sum, you release and discharge the Entity from the claim and all matters from and incidental to it.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Section 6-10. | Income Tax Assessment Act 1997 Section 82-130. | Income Tax Assessment Act 1997 Subsection 82-130(1). | Income Tax Assessment Act 1997 Subparagraph 82-130(1)(a)(i). | Income Tax Assessment Act 1997 Subparagraph 82-130(1)(a)(ii). | Income Tax Assessment Act 1997 Section 82-135. | Income Tax Assessment Act 1997 Section 995-1. | Income Tax Assessment Act 1997 Section 118-37. | Income Tax Assessment Act 1997 Section 118-305. Issue | Question 1 | Summary | The payment to be made to you is not being made by a superannuation fund therefore the payment is not a superannuation lump sum. | Detailed reasoning | Superannuation lump sum payment | Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997), defines a superannuation benefit as having the meaning given by section 307-5. | A lump sum payment made to a person from a superannuation fund is referred to as a superannuation lump sum. A superannuation lump sum is a superannuation benefit that is not a superannuation income stream benefit (section 307-65 of the ITAA 1997). | The table contained in subsection 307-5(1) of the ITAA 1997 lists various types of superannuation benefits. One type of superannuation benefit is a superannuation fund payment. Item 1 of the table states that a superannuation fund payment will be a superannuation member benefit if it is: | A payment to you from a superannuation fund because you are a fund member. | In this case, the payment is being made to you under the terms of the Deed by the Entity. | The payment to be made to you did not arise as a result of you being a fund member. Although the payment is being made in respect of benefits or entitlements connected to superannuation, it is not being made to you by a superannuation fund. | Therefore the payment to be made to you under the Deed is not a superannuation lump sum. | Question 2 | Summary | The payment to be made to you under the Deed in the 2013-14 income year is not an employment termination payment as the payment is not being made in consequence of your termination of employment. | Detailed reasoning | Employment termination payment | Section 995-1 of the ITAA 1997 states that: | employment termination payment has the meaning given by section 82-130 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. | A life benefit termination payment is an employment termination payment to which subparagraph 82-130(1)(a)(i) of the ITAA 1997 applies. | Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including: | Ÿ a payment for unused annual leave or unused long service leave; | Ÿ the tax-free part of a genuine redundancy payment or an early retirement scheme payment. | To determine if a payment constitutes an employment termination payment, all the conditions in section 82-130 of the ITAA 1997 must be satisfied. | Failure to satisfy any of the conditions under subsection 82-130(1) of the ITAA 1997 will result in the payment not being considered an employment termination payment. Furthermore, any termination payments received outside of the 12 months will be taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12 month rule. | Paid as a consequence of the termination of your employment | For a payment to be treated as an employment termination payment, the first condition that needs to be met is that there must be a payment that is made in consequence of the termination of employment of the taxpayer (see subparagraph 82-130(1)(a)(i) of the ITAA 1997). | 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. | While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of the 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. From 1 July 2007, eligible termination payments ceased to exist and replaced by employment termination payments. 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. | You have referred to the decision handed down in the case of John Griffith Cornwell v. the Commissioner of Australia (2007) High Court of Australia 16 (Cornwell). In the Cornwell decision the High Court accepted Mr Cornwell's submission that the compensable entitlement arose under a federal statute concerning superannuation benefits and was crystallised upon retirement. Further, we note that the cause of action arose under the tort of negligence and not in respect of the employment contract. | Accordingly, in similar circumstances our view is that a lump sum payment receipt is not a benefit in respect of employment. | In the present case you lodged a claim similar to the 'Cornwell' for compensation to an entity (the Entity). You alleged that you would have received greater superannuation benefits upon retirement than those you actually received but for the incorrect advice regarding your eligibility to join a superannuation fund (the Fund). | Discussions were held between the Entity and yourself where an agreement was reached. The matter is being settled out of court under the Deed with the Entity agreeing to a specified payment to be made to you. | The Deed referred to the settlement sum to be made to you in full and final settlement for damages and nothing for legal costs and expenses. | The payment to be made to you did not arise as a result of the termination of your employment with the employer. While the payment was made in respect of you, the payment was not made as 'in consequence of' any termination of your employment. That is, the payment did not follow as an effect or result of the termination of employment nor was the payment conditional on the termination of your employment with the employer. | Therefore, it is considered that the payment is not being made in consequence of the termination of your employment. | As the payment is not being made in consequence of the termination of your employment with the employer, the first condition under paragraph 82-130(1)(a) of the ITAA 1997 has not been satisfied. | Given the failure to satisfy paragraph, 82-130(1)(a), of the ITAA 1997 it is not necessary to consider the application of paragraphs 82-130(1)(b) and (c) because, as previously noted, for a payment to constitute an employment termination payment, all the conditions in subsection 82-130(1) need to be satisfied. | Therefore, as the first condition has not been satisfied the payment is not an employment termination payment under subsection 82-130(1) of the ITAA 1997 and therefore Division 82 will not apply to the payment. | Question 3 | Summary | The lump sum payment to be received by you pursuant to the Deed is not assessable, either as ordinary income or under the capital gains tax provisions. | Detailed reasoning | Ordinary income | Section 6-5 and section 6-10 of the ITAA 1997 provides that the assessable income of a taxpayer includes ordinary and statutory income derived directly and indirectly from all sources during the income year. | Ordinary income has generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business. | Other characteristics of income that have evolved from case law include receipts that: | · are earned | · are expected | · are relied upon | · have an element of periodicity, recurrence or regularity. | In your case, you are to receive a lump sum settlement amount in relation to your claim made against the Entity alleging that you would have received greater superannuation benefits upon retirement than those you actually received but for the incorrect advice regarding your eligibility to join a superannuation fund. | This amount is not income from rendering personal services, income from property or income from carrying on a business. It is also not earned, expected or relied upon and is a one-off payment and thus does not have an element of recurrence or regularity. | The lump sum payment is therefore not considered to be ordinary income, but rather, capital in nature. | Capital gains tax | A CGT event occurs when you receive the lump sum payment and release and discharge the Commonwealth from the claim. | Section 118-305 of the ITAA 1997 provides for a capital gain to be disregarded if it is made in relation to certain rights associated with superannuation. Specifically, a capital gain may be disregarded if it relates to a right to an amount payable out of a superannuation fund. | As the lump sum payment relates wholly to your interest in a superannuation fund, any capital gain or loss that arises will be disregarded. | Conclusion | As the lump sum payment is not ordinary income, an employment termination payment, or assessable as a capital gain or loss, the amount does not need to be included in your income tax return.