Private ruling: Lump sum payment
Date of advice: 11 May 2018
Published: August 2018
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the amount paid to you under a Deed of Agreement and Release (the Deed) included in your assessable income as ordinary income? | A1: No. | Q2: Is the amount paid to you under the Deed an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes.

Relevant facts and circumstances: You had been employee of your former employer. You commenced legal action against your employer. Without admission, you and your former employer agreed to settle all matters pertaining to the employment and termination. A Deed of Settlement and Release was entered into. Your former employer paid a settlement sum to you as outlined in the Deed. The terms of the agreement were set out in the Deed which, as far as relevant, provided that your former employer would pay you an amount (the Settlement Sum). In consideration for the payment of the Settlement Sum you agreed to: ● resign from your employment with your former employer, and ● cease the legal action against your employer. Part of the Settlement sum was paid to you within 12 months of the termination of your employment. Another part of the Settlement sum is being withheld by your former employer pending the outcome of this ruling.

Relevant legislative provisions: Income Tax Assessment Act subsection 6-5(2) | Income Tax Assessment Act section 6-10 | Income Tax Assessment Act section 15-2 | Income Tax Assessment Act section 82-130 | Income Tax Assessment Act section 82-135

Reasons for decision: Summary: The amount paid to you is not ordinary income; it is an ETP under section 82-130 of the ITAA 1997. | Detailed Reasoning - Ordinary income: Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income has generally been held to include 3 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, and ● have an element of periodicity, recurrence or regularity. In your case, the amount payable to you under the Deed is not income from rendering personal services, income from property or income from carrying on a business. The amount was not earned by you as it does not relate to services performed. The amount is also a one off payment and thus it does not have an element of recurrence or regularity. Although the amount can be said to be expected, and perhaps relied upon, this expectation arises from the circumstances surrounding your termination rather than from a relationship to personal services performed. Consequently, the amount is not ordinary income and is therefore not assessable under section 6-5(2) of the ITAA 1997. | Detailed Reasoning - Statutory income: Amounts that are not ordinary income, but are included in your assessable income by another provision are called statutory income (section 6-10 of the ITAA 1997). The provisions dealing with statutory income are listed in section 10-5 of the ITAA 1997. Included in this list is section 15-2 of the ITAA 1997. All allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you is included your assessable income (subsection 15-2(1) of the ITAA 1997). However, employment termination payments are not included in your assessable income under section 15-2 of the ITAA 1997 (subsection 15-2(3) of the ITAA 1997). | Detailed Reasoning - Employment termination payment: Employment termination payments (ETP) are defined in subsection 82-130(1) of the ITAA 1997, which 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. To determine if a payment is an ETP, all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any one of the conditions under subsection 82-130(1) will result in the payment not being considered an employment termination payment. | Detailed Reasoning - Paid ‘in consequence of’ the termination of your employment: The phrase ‘in consequence of’ is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Taking into account the courts decisions 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' (TR 2003/13). While TR 2003/13 contains references to repealed provisions, some of which may have been rewritten, the ruling 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 use the term ‘in consequence of’ in the same manner. In paragraphs 5 and 6 of TR 2003/13, the Commissioner states: 5. … 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. 6. The phrase requires 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. In this instance, in consideration of the payment of the Settlement Sum you were required, among other things, to resign from your employment with your former employer. That is, the termination of your employment was a pre-condition for the payment. Therefore, although the dominant cause of the payment may have been to settle all matters in relation to the legal action and your employment with your former employer, there is a causal connection between the termination of your employment and the payment. In other words, but for the termination, the payment would not have been made. Consequently, the payment of the Settlement Sum is considered to be made ‘in consequence of’ the termination of your employment with your former employer. | Detailed Reasoning - Payment receipt date, no later than 12 months: In accordance with the terms of the Deed, your employment was to terminate immediately on the signing of the Deed. As part of the Settlement Sum was received within 12 months of your termination, the 12 month rule is satisfied for this part. Provided the remaining amount is received within 12 months of the termination of your employment, this condition will be satisfied in respect of that amount also. | 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 and, relevantly, includes: (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 ). Therefore, to exclude all or part of an amount under subsection 82-135(i) of ITAA 1997, there must be an identifiable amount which has been calculated in respect of the personal injury that is capable of being dissected from the total Settlement Sum. The exclusion under subsection 82-135(i) of the ITAA 1997 does not apply in your case. As it is our view that subsection 82-135(i) of the ITAA 1997 does not apply to the Settlement Sum, that amount is an ETP under section 82-130 of the ITAA 1997 and is to be included in your tax return for the 20XX-XX income year.