Private ruling: Employment termination payment
Published: October 2013
Ruling period: For the year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the payment received by the taxpayer as a result of legal action an employment termination payment in accordance with subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: Your client is under 55 years of age. Your client commenced employment with the employer several years age. There was no written contract of employment. On a specific date during the relevant income year, your client's employment was terminated by the employer. In the relevant income year, your client commenced proceedings under the Fair Work Act 2009 (Cth) in the Federal Magistrates Court of Australia (the Court). In the relevant income year, the matter was listed for hearing in the Court. In the subsequent income year, the Court ordered that the employer pay compensation in the sum of a specific amount (the lump sum payment) for loss suffered by your client. The lump sum payment was received by your client in the subsequent income year.

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 Paragraph 82-130(1)(b). | Income Tax Assessment Act 1997 Paragraph 82-130(1)(c). | Income Tax Assessment Act 1997 Subsection 82-130(4). | Income Tax Assessment Act 1997 Subsection 82-130(7) | Income Tax Assessment Act 1997 Section 82-135.

Reasons for decision: Summary: The payment received by your client is an employment termination payment as it was made in consequence of the termination of your client's employment. | Detailed Reasoning - Employment termination payment: A payment is an employment termination payment if the payment satisfies all the requirements in section 82-130 of the Income Tax Assessment Act 1997 (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. In this case, it is not necessary to examine in detail if the payment made to your client was made in consequence of the termination of your client's employment. Based on the information provided, the lump sum payment was made to your client in consequence of the termination of your client's employment because there is a nexus between the termination of your client's employment in the relevant income year and the lump sum payment made to your client in the subsequent income year. The payment would not have been made had there been no termination of employment. The legal action, the termination of employment and the payment are all intertwined and connected. If not for the termination of employment, the issue of paying a lump sum would not have arisen. | Detailed Reasoning - Payment received more than 12 months after termination: In addition to meeting the other conditions for a payment to be an employment termination payment, paragraph 82-130(1)(b) of the ITAA 1997 specifies that the settlement sum must be received within 12 months of the employees termination of employment, unless they are covered by a determination exempting them from the 12 month rule. As already noted in the facts, your client's employment was terminated in the relevant income year and the payment was made in the subsequent income year which is more than 12 months after your client's termination of employment. Notwithstanding the fact that your client received the payment more than 12 months after them termination of employment, it is considered that the payment in this instance is exempted from the 12 month rule by the operation of paragraph 82-130(4)(a) and subsection 82-130(7) of the ITAA 1997. Paragraph 82-130(4)(a) of the ITAA 1997 states: Paragraph (1)(b) does not apply to you if: You are covered by a determination under subsection (5) or (7); Subsection 82-130(7) of the ITAA 1997 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. The Employment Termination Payments (12 month rule) Legislative Instrument 2007 is a determination made under subsection 82-130(7) of the ITAA 1997, which has been registered by the Commissioner on the Federal Register of Legislative Instruments. In accordance with paragraph 3 of the determination entitled Application , it will apply to a payment received by a person after 30 June 2007 if the payment is received: (a) either (i) in consequence of the termination of that persons employment, or (ii) after another persons death, in consequence of the termination of that other persons employment; and (a) more than 12 months after that termination; and (b) is not a payment under section 82-135 of the Income Tax Assessment Act 1997. Where these conditions are satisfied, the payment is referred to in the determination as a late termination payment . In accordance with paragraph 4 of the instrument entitled Determination , paragraph 82-130(1)(b) of the ITAA 1997 will not apply to a late termination payment if the payment is received more than 12 months after the termination of a persons 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 persons entitlement to the payment; (ii) the amount of the persons entitlement; or (a) the payment was made by a liquidator, receiver or trustee in bankruptcy of an entity that is otherwise liable to make the payment, where that liquidator, receiver or trustee is appointed no later than 12 months after the termination of employment. In this case legal action was commenced within 12 months of your client's termination of employment. Accordingly, it is considered that the conditions for the payment to be viewed as a late termination payment are satisfied. The payment is exempt from the 12 month rule found in paragraph 82-130(1)(b) of the ITAA 1997. Therefore the requirement of paragraph 82-130(1)(b) of the ITAA 1997 is met. | Detailed Reasoning - Not a payment mentioned in section 82-135 of the ITAA 1997: Section 82-135 of the ITAA 1997 lists payments that are not employment termination payments. These include (among others): · superannuation benefits; · unused annual leave or long service leave payments; · foreign termination payments covered under Subdivision 83-D of the ITAA 1997; and · the tax free part of a genuine redundancy payment or an early retirement scheme payment. In this case, the facts provided show that the payment did not include any of the payments mentioned in section 82-135 of the ITAA 1997 which would preclude any part of the payment from being an employment termination payment. Consequently, it is considered that the payment is not of a type mentioned in section 82-135 of the ITAA 1997. As the payment is not a payment mentioned in section 82-135, the requirement of subparagraph 82-130(1)(c) of the ITAA 1997 is met.