Private ruling: Settlement payment
Date of advice: 22 November 2018
Published: February 2019
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the sum of $X paid to you by your former employer assessable as ordinary income? | A1: No. | Q2: Can you disregard any capital gain or loss arising from the sum of $X paid to you by your former employer? | A2: Yes. | Q3: Is the sum of $X paid to you by your former the employer an employment termination payment (ETP) for the purposes of section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: Yes.

Relevant facts and circumstances: You commenced employment with the Employer. The Employer advised you in a memo that their office would be relocating to another location. You advised the Employer that the new location would impact your second job and cause significant stress due to a longer commute in more hazardous conditions. You enquired as to whether there were other options available that would allow you to continue working, such as working from home. The Employer advised that there were not. You wrote to the Employer advising that you considered that you had been made redundant as the relocation was not reasonable, and that your last day of employment would be the day before the office relocated. The Employer accepted your letter as notice of resignation. You lodged an application for Unfair Dismissal with the Fair Work Commission alleging a breach of contract due to unreasonable relocation which resulted in the redundancy of your position (the Claim). You and the Employer entered into a Deed of Release and Settlement (the Deed) to settle the Claim. The Deed provides, in part, that: (a) The Employer, without admission of any liability, will pay to you a sum of $X gross, less applicable tax (the Settlement Sum). (b) You will discontinue all claims against the Employer and release and discharge the Employer from claims you otherwise had against the Employer arising out of, either directly or indirectly, the employment, including the Employment, the Termination and the Proceedings. (c) Within 48 hours of the Settlement Sum being paid, you must discontinue the Claim. The Employer paid the Settlement Sum to you. On your payslip, the Employer listed the Settlement Sum as ‘backpay’. Your PAYG payment summary incorporates the Settlement Sum into their salary and wages.

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

Reasons for decision: Summary: The Settlement Sum ($X) paid by the Employer to you is considered to be an ETP for the purposes of section 82-130 of the ITAA 1997. | Detailed Reasoning - Employment termination payments: In accordance with section 82-130 of the ITAA 1997, a payment is ETP 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. | Detailed Reasoning - In consequence of termination of 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’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 still has effect 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. Payments made to a taxpayer as a result of settlement of a claim arising out of the termination of the taxpayer’s employment are specifically addressed in paragraph 31 of TR 2003/13 which states: 31….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 this instance, the Settlement Sum was paid to you to settle the Claim brought by you as a result of the termination of your employment. As such, there is a causal connection between the termination of employment and the payment. That is, but for the termination of your employment, the Settlement Sum would not have been paid to you. Consequently, the payment of the Settlement Sum is ‘in consequence of’ the termination of your employment with the Employer. | Detailed Reasoning - Payment is received no later than 12 months after termination: Your employment was terminated on and the Settlement Sum was paid. This is less than 12 months after the termination of your employment. Additionally, the payment of the Settlement Sum is not a payment mentioned in section 82-135 of the ITAA 1997. Therefore, the Settlement Sum is an ETP pursuant to section 82-130 of the ITAA 1997.