Private ruling: Employment termination payment
Published: April 2014
Ruling period: Income year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the payment you received under a settlement deed an employment termination payment (ETP) in accordance with section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You were employed by the Employer several years ago. You commenced legal proceedings against the Employer, following a finding that you had breached the Code of Conduct. You sought an interlocutory injunction to prevent your dismissal by the Employer, however the injunction was not granted. Your employment was terminated and your entitlements to long service and annual leave were paid out on the day of termination. After your termination you resumed legal action against the Employer on the basis that your termination was unlawful and caused damage to your reputation. You and the Employer reached an agreement outlined in a deed (the Deed). The Deed states that the Employer will pay you a gross amount (the Payment) and withhold taxes from the Payment. Relevantly, the Deed states: • Without admission of liability, you and the Employer have agreed to settle the Proceedings and all claims on the terms contained in the Deed. • The document fully satisfies the rights that you, and anyone who claims through you, has or may have against the Employer arising out of the Proceedings, the Employment and the Termination. • You release the Employer from all claims and liability arising out of the Proceedings, the Employment and the Termination. • You will not make any further claim or bring any further legal proceedings against the Employer in respect of any matter arising out of the Proceedings, the Employment and the Termination. You assert that the Payment should not have been characterised as an ETP as it was not a payment made in the course of your employment, but rather was money paid as consideration of you ceasing legal action against the Employer.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 82-10(1) | Income Tax Assessment Act 1997 subsection 82-10(2) | Income Tax Assessment Act 1997 paragraph 82-10(3)(a) | Income Tax Assessment Act 1997 section 82-130 | Income Tax Assessment Act 1997 subsection 82-130(1) | Income Tax Assessment Act 1997 subparagraph 82-130(1)(a)(i) | Income Tax Assessment Act 1997 paragraph 82-130(1)(b) | Income Tax Assessment Act 1997 paragraph 82-130(1)(c) | Income Tax Assessment Act 1997 subsection 82-130(4) | Income Tax Assessment Act 1997 section 82-135 | Income Tax Assessment Act 1997 section 82-160

Reasons for decision: Summary: The Payment made to you by the Employer is an ETP under section 82-130 of the ITAA 1997. | Detailed Reasoning - Employment termination payments: Subsection 82-130(1) of the ITAA 1997 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 that termination (but see subsection (4)); and (c) It is not a payment mentioned in section 82-135. All three requirements must be satisfied in order for the payment to be treated as an ETP. | Detailed Reasoning - Payment made in consequence of the termination of employment: The first condition is that you received the payment in consequence of the termination of your employment. The phrase 'in consequence of' is not defined in the ITAA 1997. However, the words have been interpreted by the courts in several cases. In light of these decisions, the Commissioner discusses the meaning of the phrase 'in consequence of' in the context of the expression 'in consequence of the termination of any employment' (as was formerly used in Subdivisions A and AA of Division 2 of Part III of the Income Tax Assessment Act 1936 ) in Taxation Ruling TR 2003/13 (TR 2003/13). While TR 2003/13 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect. At paragraphs 5 and 6 of TR 2003/13, the Commissioner states: 5. The phrase 'in consequence of' is not defined in the ITAA 1936. However, the words have been interpreted by the courts in several cases. Whilst there are divergent views as to the correct interpretation of the phrase, the Commissioner considers that 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. You were employed by the Employer until your employment was terminated. You commenced legal action against the Employer on the basis that your termination was unlawful and caused damage to your reputation. You and the Employer came to an agreement under the terms and conditions set out in the Deed and the Payment was made as part of the Deed. By entering into the Deed with the Employer, you agreed to release the Employer from all claims relating to your employment and its termination. Although the dominant cause of the payment was to settle the dispute, there is a causal connection between the termination of employment and the Payment. As outlined in TR 2003/13 above, it is not necessary that the termination of employment is the dominant cause of the payment. The termination of employment, the Deed and the Payment are all intertwined and connected. If not for the termination of employment, the Payment would not have been made. Consequently, the Payment is considered to be received by you in consequence of the termination of your employment and the requirement of subparagraph 82-130(1)(a)(i) of the ITAA 1997 is satisfied. | Detailed Reasoning - The 12 month rule: To qualify as an ETP, paragraph 82-130(1)(b) of the ITAA 1997 requires that the payment should be received no later than 12 months after the termination of employment, unless subsection 82-130(4) of the ITAA 1997 applies. Your employment with the Employer terminated and you received the Payment. You received your ETP within 12 months of your termination and so it satisfies this condition. | Detailed Reasoning - Payments excluded from being ETPs: The requirement in paragraph 82-130(1)(c) of the ITAA 1997 is that each payment is not a payment mentioned in section 82-135 of the ITAA 1997. As the Payment does not fall under the type listed in section 82-135 of the ITAA 1997, this condition is satisfied. As all of the conditions have been met, the payment satisfies the definition and is an ETP for the purposes of section 82-130 of the ITAA 1997. | Detailed Reasoning - Tax treatment of the ETP: An ETP made after 1 July 2007 will be comprised of the following components: • Tax free component; and/ or • Taxable component. Under subsection 82-10(1) of the ITAA 1997, the tax free component of an ETP is not assessable and is not exempt income. The taxable component is assessable income under subsection 82-10(2) of the ITAA 1997. For recipients who are at their preservation age or older in the income year in which the payment is received, paragraph 82-10(3)(a) of the ITAA 1997 provides a tax offset to ensure the rate of tax on the amount does not exceed 15%. As you have met your preservation age, you are entitled to the tax offset.