Private ruling: Employment termination payments
Date of advice: 6 December 2016
Published: May 2017
Ruling period: Income year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Should the taxable component of a termination payment (the Termination Payment) received by a person (the Taxpayer) be excluded from the whole-of-income cap under paragraph 82-10(6)(d) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: The Taxpayer was employed by an entity (the Employer). The Taxpayer was subject to a performance review. At the conclusion of the review the Taxpayer was advised that their performance was unsatisfactory and the Taxpayer would commence a period of performance management. After a protracted performance management process, the Taxpayer felt that they had no choice but to resign from their employment with the Employer. However, before the Taxpayer resigned, the Taxpayer and the Employer engaged in a lengthy negotiation process as to the terms of their resignation. The Taxpayer and the Employer subsequently agreed on the terms of the Taxpayer's termination and a Deed of Release (the Deed) was signed to give effect to their agreement. The Deed, under the heading, 'Recitals' has been advised. Relevantly, the terms of the Deed have been detailed. The Employer paid to the Taxpayer the Termination Payment as agreed under the Deed.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-10 | Income Tax Assessment Act 1997 Subsection 82-10(1) | Income Tax Assessment Act 1997 Subsection 82-10(2) | Income Tax Assessment Act 1997 Subsection 82-10(3) | Income Tax Assessment Act 1997 Subsection 82-10(4) | Income Tax Assessment Act 1997 Subsection 82-10(5) | Income Tax Assessment Act 1997 Subsection 82-10(6) | Income Tax Assessment Act 1997 Paragraph 82-10(6)(d) | Income Tax Rates Act 1986 Schedule 7.

Reasons for decision: Summary: The Termination Payment received by the Taxpayer on the termination of their employment is not an excluded payment as defined in subsection 82-10(6) of the ITAA 1997. Therefore, the whole-of-income cap applies to the payment. | Detailed Reasoning - Detailed reasoning: The taxation of life benefit termination payments is outlined in section 82-10 of the ITAA 1997. A 'life benefit' termination payment is an employment termination payment (ETP) received by a person in consequence of the termination of that person's employment. For tax purposes, it consists of two components: ● a tax free component, and ● a taxable component Subsection 82-10(1) of the ITAA 1997 states that the 'tax free component' of a life benefit termination payment is not assessable income and is not exempt income. In accordance with subsection 82-10(2) of the ITAA 1997, the 'taxable component' of a life benefit termination payment is assessable income. However, in accordance with subsection 82-10(3) of the ITAA 1997, a tax offset applies to ensure that the rate of income tax on the amount mentioned in subsection (4) of the ITAA 1997 does not exceed: (a) if you are your * preservation age or older on the last day of the income year in which you receive the payment -15%; or (b) otherwise - 30%. *To find definitions of asterisked terms, see the Dictionary, starting at section 995-1. Subsections 82-10(4) and (5) of the ITAA 1997, outline how the relevant amount is worked out. According to these subsections, the amount is either: a. the 'ETP cap amount' (being $175,000 in the 2012-13 income year) reduced by the amount of any earlier ETPs received in the same income year, or b. the lessor of: i. the ETP cap amount (reduced by the amount of any earlier ETPs received in the income year); and ii. the 'whole-of-income cap amount' (being $180,000 minus other taxable income earned throughout the income year). In accordance with Schedule 7 of the Income Tax Rates Act 1986 , any part of the taxable component that exceeds the ETP cap amount (the 'employment termination remainder') is taxed at the top marginal rate. | Detailed Reasoning - Excluded payments: According to paragraph 82-10(6)(d) of the ITAA 1997, the whole-of-income cap does not apply to certain termination payments. These payments are known as 'excluded payments' and relevantly include payments 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. We accept that a genuine dispute, as contemplated by paragraph 82-10(6)(d) of the ITAA 1997, concerning the Taxpayer's performance did exist between the Taxpayer and the Employer and that the Termination Payment was made to the Taxpayer in connection with that dispute. However, we do not accept that process which lead to the termination of the Taxpayer's employment in this case constitutes an unfair dismissal because the Taxpayer had no alternative but to resign. Our view is based on the following: ● At the time the dispute concerning the Taxpayer's performance arose, the Taxpayer was still employed by the Employer; ● The terms of the Taxpayer's eventual termination were the result of a lengthy negotiations between the Taxpayer and the Employer; ● The Taxpayer agreed to the terms of the settlement set out in the Deed, which included the termination of the Taxpayer's employment; ● It is not clear from the Deed whether the termination was to be affected by resignation or dismissal; ● No documentary evidence has been provided in relation to the reasons for the termination nor does the Deed make mention of unfair dismissal; and ● The Deed states that, following the termination, the Termination Payment is to be paid to the Taxpayer in respect of all entitlements arising on termination of employment. As the payment does not meet all of the conditions under subsection 82-10(6) of the ITAA 1997, it is not an excluded payment for the purposes of subsection 82-10(6) of the ITAA 1997. Therefore the whole-of-income cap applies to the Termination Payment.