Private ruling: Assessable income
Date of advice: 28 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the payment you received for personal wrong or injury included in your assessable income? | A1: Yes.

Relevant facts and circumstances: You were employed before your employment was terminated. According to your employer, your employment was terminated because you were not achieving your KPI’s. You submitted an application for Unfair Dismissal with the Fair Work Commission (FWC). You negotiated a settlement payment due to your claim of being treated unfairly and unjustly under a general protections claim. The Deed of Release states the payment is on account of personal wrong or injury arising from your general protections claim. You received a payment from for former employer within 12 months of your employment being terminated.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(1) | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 82-130 | Income Tax Assessment Act 1997 Section 82-135 | Income Tax Assessment Act 1997 Section 118-37 | Income Tax Assessment Act 1997 Section 118-20 | Income Tax Assessment Act 1997 Section 118-22 | Taxation Administration Act 1953 Section 357-85

Reasons for decision: Summary: Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that assessable income includes income according to ordinary concepts, called ordinary income. Section 6-10 of the ITAA 1997 allows for income that is not ordinary income to be included in your assessable income, these amounts are called statutory income. Employment termination payments (ETP) are capital payments which are considered to be statutory income and are therefore assessable income. A payment made to an employee is an employment termination payment (ETP) 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: A payment is an employment termination payment if: (a) it is received by you: (a) (i) in consequence of the termination of your employment; or (b) (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. Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including: ● payment for unused annual leave or unused long service leave; ● the tax-free part of a genuine redundancy payment or an early retirement scheme payment. ● capital payments for personal injury. | Detailed Reasoning - In consequence of termination of employment: TR 2003/13 discusses the meaning of the phrase 'in consequence of’. Paragraph 2 of TR 2003/13 states that the meaning of the phrase is relevant for determining whether a payment made in respect of a taxpayer as a result of settlement of litigation arising out of the termination of the taxpayer’s employment is an ETP under section 82-130(1) of the ITAA 1997. Paragraphs 31 and 32 of TR 2003/13 deal with settlement of litigation proceedings as follows: 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. 32. The Federal Court in Dibb v. FC of T 5 adopted the approach of Goldberg J in Le Grand. At issue was whether a payment received by the taxpayer under a deed of release, following the settlement of Federal Court proceedings against his former employer, was an ETP. In deciding the payment was an ETP, Heery J held that the length of time between the termination of employment, the commencement of court proceedings and payment following settlement did not sever the causal connection between the termination and the payment. It was sufficient that the subject matter of the litigation was the termination. Heery J found at 296 that: '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 [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.' In this case the causal connection between the termination of your employment and receipt of the payment under the deed of release would establish that the payment was received in consequence of termination. | Detailed Reasoning - Payment received within 12 months of termination: Your payment was made within 12 months of the termination of your employment. | Detailed Reasoning - Payment described in section 82-135 of the ITAA 1997: Section 82-135 of the ITAA 1997 provides a list of payments that are not ETP and does not include payment received under a deed of release. Consequently it is considered that this section does not apply. In your case, you received a payment for damages for unfair dismissal from your former employer. The payment received qualifies as an ETP and is considered statutory income, therefore it is included in your assessable income. | Detailed Reasoning - Application of the capital gains tax provisions: It is noted that you have stated that the payment is exempt from capital gains tax (CGT) under section 118-37 of the ITAA 1997. The general exemption provisions (from CGT) are found in Subdivision 118-A of the ITAA 1997. Included amongst them is an anti-overlap provision, section 118-20 of the ITAA 1997, which ensures that an amount cannot be assessable under both the CGT provisions and non-CGT provisions. The effect of the 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 employment termination payment as well as a capital gain. It ensures that, for the purposes of section 118-20 of the ITAA 1997 only, the whole of the payment is included as assessable income. The combined effect of these two sections is that where a capital payment is assessable under a non-CGT provision (that is, as an employment termination payment) then it is treated as being assessable under that non-CGT provision. Accordingly, no part of the settlement payment is assessable under the CGT provisions because it is included in your assessable income as an employment termination payment. As any capital gain you make will be reduced to nil, the capital gains exemption in section 118-37 of the ITAA 1997 for compensation or damages you receive for any wrong or injury you suffer in your occupation has not been considered.