Private ruling: Employment termination payment
Date of advice: 7 November 2018
Published: February 2019
Ruling period: Income year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the Payment paid to you by your former employer (the Employer) under the Deed of Release and Settlement assessable as a capital gain? | A1: No. | Q2: Is the Payment paid to you by the Employer under the Deed of Release and Settlement an employment termination payment as defined in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes.

Relevant facts and circumstances: You were employed by the Employer. On specified date, your employment with the Employer was terminated with one week’s pay in lieu of notice. On a few days later you wrote to the Employer stating that: ● circumstances of your termination were in breach of the Fair Work Act 2009 ; ● as a result of the termination, your prospects for gaining future employment were damaged; and ● unless the Employer pays you eight weeks wages as compensation, you would submit an unfair dismissal application with the Fair Work Commission. A few days later you and the Employer agreed to settle all claims between you on the terms set out in a Deed of Release and Settlement (the Deed). In accordance with the terms of the Deed: ● you preferred for the circumstances of the termination of your employment with the Employer to be recognised as either resignation or redundancy; ● the Employer believed that it did not make your position redundant but was happy to co-operate with your request to the extent it reasonably could; ● in consideration for the release provided for in the Deed, the Employer agreed to pay you several weeks pay (the Payment) less applicable tax; and ● you released and discharged the Employer from all claims which you had or may have against the Employer in respect of or arising out of the employment or termination of your employment with the Employer. Shortly after, you received from the Employer a given amount. This amount was less a specified amount of tax. You have provided details of your date of birth.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-130. | Income Tax Assessment Act 1997 Section 82-135.

Reasons for decision: Summary: The Payment received from the Employer is an ETP as defined in subsection 82-130(1) of the ITAA 1997. | Detailed Reasoning - Employment termination payment (ETP): A payment made to an employee is an ETP if it satisfies all the conditions set out in section 82-130 of the ITAA 1997. This section states: 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 the termination (but see subsection (4)); and (c) it is not a payment mentioned in section 82-135. | Detailed Reasoning - Meaning of ‘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. Whilst the courts have divergent views on the meaning of this phrase, the Commissioner of Taxation’s (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 considered the meaning of the phrase ‘in consequence of’ in the context of the eligible termination payments, TR 2003/13 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 both 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 received by a taxpayer in consequence of the termination of the taxpayer's employment 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 received by 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 received in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case. In paragraph 31 of TR 2003/13, the Commissioner deals with settlement of litigation proceedings and states: 31. It is clear from the decision in Le Grand, that when a payment is made to settle a claim brought by a taxpayer for wrongful dismissal or claims of a similar nature that arise as a result of an employer terminating the employment of the taxpayer, the payment will have a sufficient causal connection with the termination of the taxpayer's employment. The payment will be taken to have been made in consequence of the termination of employment because it would not have been made but for the termination. In your case, the Payment was paid to you by the Employer in full and final settlement of all claims which arose between you and the Employer as a result of the termination of your employment with the Employer. While, as such, it may be said that the Payment was received in consequence of the settlement and not in consequence of the termination, had it not been for the termination, there would have been no settlement and no Payment. Therefore, in this case, the Payment was paid to you in consequence of the termination of your employment with the Employer because it is evident that but for the termination, the payment would not have been made. | Detailed Reasoning - Payment received within 12 months of termination: Your employment was terminated and your received the Payment within a number of days. Therefore your payment was made within 12 months of the termination of your employment | Detailed Reasoning - Payment mentioned in section 82-135 of the ITAA 1997: Section 82-135 of the ITAA 1997 lists payments that are not ETP, none of which applies in this case. Based on the above, all the conditions in subsection 82-130(1) of the ITAA 1997 have been met. Therefore, the Payment is an ETP as defined in section 82-130 of the ITAA 1997.