Private ruling: Employment Termination Payment- Deed of Release
Date of advice: 19 September 2018
Published: October 2018
Ruling period: Year ended 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Is the settlement sum the client received an employment termination payment? | A1:  | Q2: Is the settlement sum ordinary income? | A2:  | Q3: Does the settlement sum give rise to a capital gain? | A3: 

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. ● You commenced employment with the Employer in 201A. ● You made an Industrial Complaint against the Employer in 201B. ● As a result of the Industrial Complaint the Employer investigated and resolved that there was no breach to policy. ● In mid 201C you submitted a claim for compensation for ‘an illness’ due to a variety of reasons. ● The Employer issued a determination at the end of 201C rejecting the claim for compensation. ● You filed an Application for Review in the Employment Tribunal. You stated that you suffered an incapacity for work as a result of the alleged injury. ● In 201C you filed an Application for Suitable Employment in the Employment Tribunal. ● The Employer rejected the application for Suitable Employment on the basis that you have not suffered a compensable work injury. ● The resolution of the proceedings in the Employment Tribunal is subject to Consent Orders between the parties which will be filed in the Employment Tribunal. ● It is anticipated that both parties will agree to settle claims and all other employment related issues in the terms contained in a Deed of Release (the Deed) with no admission of liability. ● There is an assumption that the terms of the Deed will not change significantly. In the event that this occurs the private ruling may not apply. ● The Deed, at section 4 subsection 3.1 states; with a denial of liability, the Employer; will pay to the Employee a sum as an ex gratia payment for non-economic loss/pain and suffering/ hurt and humiliation (the Settlement Sum) into the Employee’s nominated bank account and will pay the Settlement Sum to the Employee no later than 14 days after the Employer receives a signed copy of this Deed and the sealed Consent Orders of the Employment Tribunal. ● The Deed at clause 4 subsection 3.2, which relates to resignation, states: In consideration of the Settlement Sum, the Employee will voluntarily resigns from their employment with the Employer with effect from the date on which the Consent Orders are sealed by the Employment Tribunal and agrees that he does not wish the Employer to provide him with employment at any time after the Resignation date. ● You provided an undated resignation form. ● You were born in the 1990’s. ● The ex-gratia payment will be a lump sum.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 27A(1). | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1997 Section 118-A | Income Tax Assessment Act 1997 Section 118-20 | Income Tax Assessment Act 1997 Section 118-22 | 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 Section 82-135 | Income Tax Assessment Act 1997 Paragraph 82-135(i)

Reasons for decision: Summary: The payment that will be made to you under the terms of the Deed is considered to be an employment termination payment. The payment, is not a capital payment for, or in respect of a personal injury therefore is not exempt from being an employment termination payment. The total amount is a taxable component of an employment termination payment and is to be included in your income tax return for the 2018-19 income year. | Detailed Reasoning - Employment termination payment: A payment made to an employee 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. Subsection 82-130(1) of the ITAA 1997 states: 82-130(1) 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 persons 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. The phrase in consequence of is not defined in the ITAA 1997. However, the words have been interpreted by the courts in several cases. The Commissioner has also issued Taxation Ruling TR 2003/13 (TR 2003/13) which discusses the meaning of the phrase. The Full High Court considered the expression in consequence of in Reseck v FC of T (1975) 133 CLR 45; 6 ALR 642; 49 ALJR 370; 5 ATR 538; 75 ATC 4213 ( Reseck ). Justice Gibbs stated: Within the ordinary meaning of the words a lump sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination It is not in my opinion necessary that the termination of the services should be the dominant cause of the payment. While Justice Jacobs stated: It was submitted that the words in consequence of import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a following on. In looking at the phrase in consequence of the Full Federal Court in McIntosh v FC of T (1979) 25 ALR 557; 10 ATR 13; 45 FLR 279; 79 ATC 4325 ( McIntosh ) considered the decision in Reseck . Justice Brennan stated: Though Jacobs J. speaks in different terms, his meaning may not be significantly different from the meaning of Gibbs J... His Honour denies the necessity to show that retirement is the dominant cause, but he does not allow a temporal sequence alone to suffice as the nexus. Though the language of causation often contains the seeds of confusion, I apprehend his Honour to hold the required nexus to be (at least) that the payment would not have been made but for the retirement. The Commissioner in TR 2003/13 considered the phrase in consequence of as interpreted by the Courts. Paragraph 5 of TR 2003/13 states: the Commissioner considers that 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. 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. Where, under a deed of release, before any payment is payable the taxpayer is required to resign from employment, it has been held that a payment not paid specifically in relation to that termination is, nevertheless, also an ETP. In Le Grand v. Commissioner of Taxation (2002) FCA 1258; 124 FCR 53; 195 ALR 194;2002 ATC 4907; 51 ATR 139 (Le Grand), the payment received was not only in respect of the termination of employment. In holding the payment for damages to also be an ETP, Goldberg J stated at paragraph 35: I am satisfied that the payment was an effect or result of that termination in that there were a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment. True it is that the payment was made not only to settle the applicants claim for common law damages for breach of the employment agreement but also for statutory damages... Justice Heerey in Dibb v. Commissioner of Taxation 2003 ATC 4613; (2003) 53 ATR 290; [2004] ALMD 5781; [2003] FCA 673 (Dibb) stated that: 22. The concept of a payment in consequence of the termination of any employment was expounded by the High Court in Reseck v FC of T 75 ATC 4213; (1975) 133 CLR 45 and by the Full Court of the Federal Court in McIntosh v FC of T 79 ATC 4325; (1979) 25 ALR 557. These authorities are analysed by Goldberg J in Le Grand v FC of T 2002 ATC 4907 at 4911-4913 [25-30] and 4914 [33-34]; (2002) 195 ALR 194 at [25] to [30] and [33] to [34]. I adopt his Honours analysis. 23. In my opinion the Commissioner was correct in ruling that the payment under the Deed was made in consequence of the termination of the applicant’s employment with AVCO. True it is there was a substantial lapse in time between the termination and the commencement of Federal Court proceeding and a further period of time until settlement. However the reason for that delay was the time taken up with the litigation first in the Commission and then in the Federal Court itself. The subject matter of the litigation in the Federal Court was clearly the termination, the allegedly wrongful way AVCO effected it and its financial and other consequences for the applicant. 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 ATC 4915 [36]; ALR [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. This reasoning was accepted by the Full Federal Court in Dibb v. Commissioner of Taxation (2004) 207 ALR 151; 2004 ATC 4555; (2004) 55 ATR 786; (2004) 136 FCR 388; [2004] ALMD 5780; [2004] FCAFC 126 by Justices Spender Dowsett and Allsop in determining the appeal against Justice Heerey’s decision. It is noted that in McMahon v. FC of T 99 ATC 2025; (1999) 41 ATR 1056 (McMahon), the deed of release recognised two amounts. One payment was made specifically in respect of termination of employment and one for damage to reputation. Both payments in that case were held to be ETPs by the Administrative Appeals Tribunal (AAT), as there was a causal connection between the termination of employment and the payments. In the present case, there was a dispute between you and the Employer regarding your claims for compensation in relation to alleged work injuries you sustained, example given. The facts show rejection of your claims to injuries by your Employer and an agreement was agreed to by the parties (i.e. your representative and the Employer). In addition to the orders there was attached an agreement (the Agreement), which will be signed by the parties, under which you will be paid an ex-gratia payment (the Payment). As part of the Agreement you are also required to resign from your employment. The Courts have held that settlement amounts arising from actions that are connected with the termination of employment are payments made in relation to the taxpayer in consequence of the termination of their employment. Therefore there is a causal connection between the termination of your employment and the Payment. Given the nature of the dispute, the Agreement, the termination of employment and the Payment, it is considered they are all intertwined and connected. Based on the principles stated in Reseck , McIntosh , Le Grand, McMahon and Dibb and the Commissioner's views expressed in TR 2003/13, the facts presented demonstrate a connection or a link exists between the termination of your employment and the payment. You would not otherwise have received the payment except for the termination of your employment. Consequently, the Payment is considered to be an employment termination payment in accordance with subparagraph 82-130(1)(a)(i) of the ITAA 1997 and is assessable as an employment termination payment to the extent that it is not specifically excluded under section 82-135 of the ITAA 1997. | Detailed Reasoning - Exclusions under section 82-135 of the ITAA 1997: The condition specified in paragraph 82-130(1)(c) of the ITAA 1997 is that an employment termination payment does not include a payment mentioned in section 82-135 of the ITAA 1997. Section 82-135 of the ITAA 1997 includes payments such as pensions, foreign termination payments, unused annual leave and unused long service leave and the tax free part of genuine redundancy payments or early retirement scheme payments. as well as other types of payments which are not considered to be employment termination payments. In your case, consideration has been given to whether the Payment is covered by the specific exemption for personal injury in paragraph 82-135(i) of the ITAA 1997 (payments that are not employment termination payments) which states: (i) a capital payment for, or in respect of, personal injury to you so far as the payment is reasonable having regard to the nature of the personal injury and its likely effect on your capacity to derive income from personal exertion (within the meaning of the definition of income derived from personal exertion in subsection 6(1) of the Income Tax Assessment Act 1936 ); The exclusion under paragraph 82-135(i) of the ITAA 1997 is for a payment or benefit that compensates or reimburses the taxpayer for or in respect of the particular injury. The facts show the Payment will not be paid to you for personal injury, or the likely effect a personal injury would have on your capacity to earn income from personal exertion, as: (a) the parties will agree to the orders made by Relevant State Workers Compensation Tribunal which confirmed the rejection of your claims to injuries; (b) the Payment will be made in accordance with the Agreement; (c) the Deed states that with denial of liability that the $X is an ex-gratia payment for non-economic loss/pain and suffering/hurt and humiliation. Accordingly, paragraph 82-135(i) of the employment termination payment definition under section 82-135 of the ITAA 1997 does not apply to the Payment. In view of the above and the information provided, it is clear that the Payment does not include any payment mentioned in section 82-135 of the ITAA 1997. | Detailed Reasoning - The 12 month rule set out in paragraph 82-130(1)(b) of the ITAA 1997:: 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 payment must be received within 12 months of the employee’s termination of employment, unless they are covered by a determination exempting them from the ‘12 month rule’. As shown in the facts, your employment will be terminated once you have signed the settlement and resignation documentation. Payment will be made no later than 14 days after the Employer receives a signed cope of the Deed. Accordingly, as the Payment will be made within 12 months of the termination of your employment, the requirement in paragraph 82-130(1)(b) of the ITAA 1997 has been satisfied. | Detailed Reasoning - Conclusion:: The Commissioner concludes that the lump sum payment is an employment termination payment as it satisfies all of the relevant provisions as shown above. | Detailed Reasoning - Tax treatment:: An employment termination payment may comprise a: ● Tax free component – as provided in section 82-140 of the ITAA 1997, this includes an invalidity segment within the meaning of section 82-150 of the ITAA 1997 (if any) and/or a pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997 (if any); and ● Taxable component – the amount remaining after deducting the tax free component from the total payment, as prescribed in section 82-145 of the ITAA 1997. As you commenced employment with the Employer in 201A the period of employment to which the Payment relates occurred wholly after 1 July 1983. Hence, the Payment will not have a pre-July 83 segment within the meaning of section 82-155 of the ITAA 1997. Therefore, as the payment contains neither a pre-July 83 segment nor an invalidity segment within the meaning of section 82-150 of the ITAA 1997, the Payment has no tax free component. Accordingly, the entire Payment is a taxable component of an employment termination payment as defined in section 82-145 of the ITAA 1997. The ex-gratia payment is an employment termination payment as defined under subsection 82-130(1) of the ITAA 1997. The ETP cap for the 2018-19 income year is $205,000. The ETP is concessionally taxed. The whole-of-income cap (WOIC) is $180,000. The WOIC is reduced by any other taxable income earned in the income year either before or after receiving the ETP. For the purposes of withholding from the ETP, you work out the cap based on the taxable income before termination. If you earn more taxable income in the same income year after the termination; for example, another job, you may pay more tax on the ETP when you lodge your tax return. This is because the taxable income earned after the termination will further reduce their whole-of-income cap. In addition, the Medicare levy may apply. | Detailed Reasoning - Other relevant comments: The general CGT exemptions provisions are found in subdivision 118-A of the ITAA 1997. Included amongst them is an anti-overlap provision, section 118-20, which ensures that an amount cannot be assessable under both the CGT provisions and non CGT provisions. The effect of the anti-overlap provision is to reduce the amount of any assessable capital gain by any amount which is also assessable under non CGT provisions and by amounts which are exempt income. Section 118-22 of the ITAA 1997 is a related section, which recognises that a CGT event could give rise to an ETP as well as a capital gain. Section 118-22 of the ITAA 1997 states that where part of an ETP is assessable under a non CGT provision, then, for the purposes of giving effect to section 118-20 of the ITAA 1997, the whole of that ETP is treated as if it had been assessable under the non CGT provision The settlement payment is assessable as an ETP under section 82-130 of the ITAA-1997 as explained above in response to Question 1. The combined effect of section 118-20 and section 82-130 is that where a capital payment is assessable under a non-CGT provision, then it is treated as being assessable under that non-CGT provision. Therefore, as the settlement sum is to be included as assessable income under section 82-130 of the ITAA 1997 (the non CGT provision) it is to be disregarded as a capital gain under sections 118-20 of the ITAA 1997. The fact that the payment may also be assessable as a capital gain does not change the fact that it is assessable under another provision of the ITAA 1997. Accordingly, the payment is excluded from the capital gains tax (CGT) provisions.

Answer: As question 1 is in the affirmative no further action needed for this question.