Private ruling: Termination of employment
Published: March 2014
Ruling period: Income year 2012-13
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the whole of income cap apply to the employment termination payment? | A1: Yes.

Relevant facts and circumstances: You commenced employment with the Employer during the 2010-11 income year. In the 2012-13 income year, you signed a Separation Agreement with the Employer. In the Separation Agreement under the heading 'Background' it states that: B The Employee has resigned from [their] employment with effect from a specific date on the terms set out in this document. C The parties have agreed to enter into this document in full and final accord and satisfaction of each and all matters arising from, relating to or in connection with the employment of the Employee and the termination of that employment. The Separation Agreement further states the amounts to be paid, subject to the deduction of tax, by the Employer several days after execution of the Separation Agreement. It also lists the various claims that are discharged by both you and the Employer. In addition it states that: The parties each agree and acknowledge that the matters in this document and this document: (a) constitute a full and final accord and satisfaction in respect of each and every matter arising from, relating to or in connection with the Employment and the Contract and the termination of the Employment and the Contract; (b) are and is a complete defence, and may be pleaded as such by any of the parties, to any proceedings or claims arising out of, relating to or in connection with the facts, matters and circumstances of the Employment and the Contract and the termination of the Employment and the Contract. In the 2012-13 income year the Employer issued a PAYG payment summary - Employment Termination Payment. The payment summary shows a taxable component was paid to you earlier in the 2012-13 income year with tax withheld.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-10. | 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)(b). | Income Tax Assessment Act 1997 Subparagraph 82-130(1)(c). | Income Tax Assessment Act 1997 Section 82-135. | Income Tax Assessment Act 1997 Section 118-20.

Reasons for decision: Detailed Reasoning - Summary of decision: The employment termination payment was not received as principally compensation for unfair dismissal. Therefore, the whole-of-income cap applies to the entire amount. | Detailed Reasoning - Detailed reasoning: From 1 July 2012, employment termination payments may be subject to a whole-of-income cap of $180,000 which is not indexed. Any part of an employment termination payment you receive that exceeds the whole-of-income cap may be taxed at 46.5%. This is regardless of whether or not it exceeds what is known as the 'ETP cap amount'. The employment termination payment tax offset mentioned in subsection 82-10(3) of the Income Tax Assessment Act 1997 (ITAA 1997) takes into account a person's other taxable income in the year that they receive an employment termination payment. The employment termination payment tax offset applies to the amount worked out under subsection 82-10(4). Subsection 82-10(4) of the ITAA 1997 states that: The following is so much of the taxable component of the payment as it does not exceed the smallest of the following: (a) the ETP cap amount reduced (but not below zero) by: (i) if the payment is a kind referred to in subsection (6) (an excluded payment) - the amount worked out under this subsection for each life benefit termination payment you have received earlier in the income year to the extent that it is excluded payment; or (ii) if the payment is not an excluded payment - the amount worked out under this subsection for each life benefit termination payment you have received earlier in the income year; (b) the ETP cap amount reduced (but not below zero) by: (i) if the payment is an excluded payment - the amount worked out under this subsection for each life benefit termination payment you have received earlier in consequence of the same employment termination (whether in the income year or an earlier income year) to the extent that it is an excluded payment; or (ii) if the payment is not an excluded payment - the amount worked out under this subsection for each life benefit termination payment you have received earlier in consequence of the same employment termination (whether in the income year or an earlier income year); (c) if the payment is not an excluded payment - $180,000, reduced (but not below zero) by your taxable income for the income year in which the payment is made. Further, subsection 82-10(5) of the ITAA 1997 provides that for the purposes of paragraph 82-10(4)(c), a person's taxable income for the income year will disregard: (a) the taxable component of the payment; and (b) the taxable component of each life benefit termination payment you receive later in the income year. However, subsection 82-10(6) of the ITAA 1997 provides that paragraph 82-10(4)(c) does not apply in relation to life termination payments: (a) that are genuine redundancy payments, or that would be genuine redundancy payments but for paragraph 83-175(2)(a); or (b) that are *early retirement scheme payments; or (c) that include *invalidity segments, or what would be invalidity segments included in such payments but for paragraph 82-150(1)(c); or (d) that: (i) are paid in connection with a genuine dispute; and (ii) are principally compensation for personal injury, unfair dismissal, harassment, discrimination or a matter prescribed by the regulations; and (iii) exceed the amount that could, at the time of the termination of your employment, reasonably be expected to be received by you in consequence of the voluntary termination of your employment. As such the whole of income cap operates to remove the tax offset in respect of employment termination payments for individuals whose taxable income exceed $180,000. It does this by: Step 1: deducting a person's taxable income from the year, other than the taxable component of any employment termination payment received, from $180,000; Step 2: calculating the person's ETP cap amount; and Step 3: comparing the result in Step 1 with the result in Step 2. The offset allowable is calculated on the lesser of these two amounts, but is not less than zero. Consequently, any amount of a taxable component of an employment termination payment that takes a person's taxable income over $180,000 will be taxed at marginal rates. To determine if an employment termination payment is excluded from the whole-of-income cap, subsection 82-10(6) of the ITAA 1997 must be satisfied. Failure to satisfy at least one of the conditions listed under this subsection will prevent the payment from being excluded under the whole-of-income cap. As noted in the facts, you entered into a Separation Agreement with the Employer during the 2012-13 income year. The Separation Agreement states that you had resigned from employment with effect on a specified date in the 2012-13 income year. Further, the Separation Agreement stipulated a termination payment to be made to you within several days of signing the Separation Agreement. Following the execution of the Separation Agreement an employment termination payment was made to you comprising of the following components: • payment in lieu of notice of termination; • a separation payment calculated as X months' salary; • a separation payment calculated as Y months' bonus. Under subsection 82-10(6) of the ITAA 1997, an amount may be excluded from the whole-of-income cap if it was a payment made in connection with a genuine dispute and is principally compensation for an unfair dismissal. This scenario would ordinarily stem from legal action taken against the former employer for unfair dismissal after the termination of employment. In this case you have argued that the payment should not be included under the whole-of-income cap as it is a payment made primarily in respect of an unfair dismissal. However, no evidence has been provided that would indicate the Separation Agreement arose as a result of an unfair dismissal claim. In fact, it is evident from the Separation Agreement that the termination of employment arose as a result of both parties agreeing to terminate the employment relationship. This is further evidenced by fact that the effective date for the termination of employment was agreed to only when both parties entered into the Separation Agreement. Prior to signing the Separation Agreement, you were not dismissed from employment. Therefore, the Separation Agreement did not result as a consequence of a dismissal or the termination of employment. Rather, it was the dismissal or termination of employment that arose (albeit backdated a few days) from the signing of the Separation Agreement. Further, the Separation Agreement provides that in return for the payment, you release the Employer from any claims you may have arising out of your employment or the cessation of that employment. It is noted that no documentary evidence from the Employer in relation to the termination of employment nor the Separation Agreement itself make mention of an unfair dismissal. The Employer made no finding or admission in respect of the payment being made for an unfair dismissal. From this it can only be concluded that the payment was made for reasons other than as principally compensation for unfair dismissal. As the payment does not meet any of the other conditions under subsection 82-10(6) of the ITAA 1997, it cannot be excluded from the whole-of-income cap. Therefore, the whole of income cap will apply to include the employment termination payment.