Private ruling: Employment termination payments
Date of advice: 22 September 2016
Published: November 2016
Ruling period: Income year ending 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Should the taxable component of the employment termination payment received by the Taxpayer be excluded from the whole-of-income cap under paragraph 82-10(6)(d) of the Income Tax Assessment Act 1997 ? | A1: No

Relevant facts and circumstances: The Taxpayer is under 65 years of age and was employed by the Employer. The Employment Agreement allowed for the summary termination of the Taxpayer's employment in certain circumstances, termination by notice of the Taxpayer and redundancy. The employment agreement did not contain a provision for the ordinary termination of employment by the Employer. The Taxpayer contended that they were wrongfully terminated by the Employer as they received no indication of serious misconduct, unsatisfactory performance or any serious breach of their Employment Agreement. Following discussions between the Taxpayer and the Employer, the parties agreed that the Taxpayer's employment would cease, as per the terms of the Deed of Release (the Deed). Amongst other clauses, the Deed states, in part: Cessation … the Employment will cease on the account of the Taxpayer resigning from their employment on the Cessation Date. On-going employment to the Cessation Date (a) The Taxpayer agrees that during the period to the Cessation date, they will continue to be employed… (b) The Taxpayer will continue to receive their salary and any other applicable benefits during the period to the Cessation Date. Payment and other agreed items The Employer agrees to pay the Taxpayer the payments set out in Schedule 2 to this Deed within 7 days of the Cessation Date. Release by the Taxpayer Subject to this Deed and the Employer complying with it, the Taxpayer hereby release and forever discharges each of the Group, their officers, servants and agents or any of them from all actions, suits, claims, demands, costs and other liabilities of any nature which the Taxpayer now or at any time may have, or but for the execution of this Deed could or might have had against each of the Group, their officers, servants and agents or any of them arising out of or in connection with the Employment and the cessation thereof. Release by the Employer Subject to this Deed and the Executive complying with it, the Employer releases and forever discharges the Taxpayer from all actions, suits, claims, demands, costs and other liabilities of any nature which the Employer now or at any time may have, or but the for the execution of this Deed, could or might have had against the Executive arising out of or in connection with the Employment and the cessation thereof. Warranty The Taxpayer warrants that: (a) they have had the opportunity to take independent legal advice as to the nature, effect and extend of this Deed; (b) they have not relied on any representations about the subject matter of this Deed except as expressly provided by the written terms of the Deed; and (c) they are aware that the Group, their officers, servants and agents, are relying upon this warranty in executing this Deed. Schedule 2 to the Deed relevantly provides: (a) 12 months' remuneration (taxed as an ETP); (b) gross annual leave and gross long service leave; (c) professional career counselling and such other counselling; and (d) legal advice in relation to this Deed; The Employer issued a PAYG payment summary - Employment Termination Payment. The payment summary shows the taxable component and tax withheld. The Taxpayer contends that the Employer had resolved to terminate their employment and their employment would have been terminated if they did not agree to sign the Deed. The Taxpayer would have subsequently commenced legal proceedings against the Employer.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-10. | 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 Subparagraph 82-130(1)(b). | Income Tax Assessment Act 1997 Subparagraph 82-130(1)(c). | Income Tax Assessment Act 1997 Section 82-135.

Reasons for decision: Summary: The employment termination payment (ETP) was not received as principally compensation for unfair dismissal. Therefore, the whole-of-income cap applies to the payment. | Detailed Reasoning - Detailed reasoning: Whole-of-income cap ETPs may be subject to a whole-of-income cap of $180,000 which is not indexed. Any part of an employment termination payment you receive that exceeds the whole-of-income cap will be taxed at the highest marginal tax rate (plus Medicare levy). Taxation of an employment termination payment Subsection 82-10(4) of the ITAA 1997 states that: The following is so much of the taxable component of the payment as does not exceed the smallest of the following: (a) the ETP cap amount reduced (but not below zero) by: (i) if the payment is a kind referred to in subsection (6) (an excluded payment) - the amount worked out under this subsection for each life benefit termination payment you have received earlier in the income year to the extent that it is excluded payment; or (ii) if the payment is not an excluded payment - the amount worked out under this subsection for each life benefit termination payment you have received earlier in the income year; (b) the ETP cap amount reduced (but not below zero) by: (i) if the payment is an excluded payment - the amount worked out under this subsection for each life benefit termination payment you have received earlier in consequence of the same employment termination (whether in the income year or an earlier income year) to the extent that it is an excluded payment; or (ii) if the payment is not an excluded payment - the amount worked out under this subsection for each life benefit termination payment you have received earlier in consequence of the same employment termination (whether in the income year or an earlier income year); (c) if the payment is not an excluded payment - $180,000, reduced (but not below zero) by your taxable income for the income year in which the payment is made. Further, subsection 82-10(5) of the ITAA 1997 provides that for the purposes of paragraph 82-10(4)(c), a person's taxable income for the income year will disregard: (a) the taxable component of the payment; and (b) the taxable component of each life benefit termination payment you receive later in the income year. However, subsection 82-10(6) of the ITAA 1997 provides that paragraph 82-10(4)(c) does not apply in relation to life benefit termination payments: (a) that are genuine redundancy payments, or that would be genuine redundancy payments but for paragraph 83-175(2)(a); or (b) that are *early retirement scheme payments; or (c) that include *invalidity segments, or what would be invalidity segments included in such payments but for paragraph 82-150(1)(c); or (d) that: (i) are paid in connection with a genuine dispute; and (ii) are principally compensation for personal injury, unfair dismissal, harassment, discrimination or a matter prescribed by the regulations; and (iii) exceed the amount that could, at the time of the termination of your employment, reasonably be expected to be received by you in consequence of the voluntary termination of your employment. As such the whole of income cap operates to remove the tax offset in respect of employment termination payments for individuals whose taxable income exceed $180,000. It does this by: Step 1: deducting a person's taxable income from the year, other than the taxable component of any employment termination payment received, from $180,000; Step 2: calculating the person's ETP cap amount; and Step 3: comparing the result in Step 1 with the result in Step 2. The offset allowable is calculated on the lesser of these two amounts, but is not less than zero. Consequently, any amount of a taxable component of an employment termination payment that takes a person's taxable income over $180,000 will be taxed at marginal rates. Payments excluded from the whole-of-income cap To determine if an employment termination payment is excluded from the whole-of-income cap, subsection 82-10(6) of the ITAA 1997 must be satisfied. Failure to satisfy at least one of the conditions listed under this subsection will prevent the payment from being excluded under the whole-of-income cap. Paid in connection with a genuine dispute The Taxpayer has contended that the Board of the Employer unilaterally decided that the Taxpayer's employment would be terminated without their knowledge or consent. Further, the Taxpayer contended the Board had resolved to terminate their employment and failing to sign the Deed, their employment would still have been terminated. The Taxpayer claims the Employer did not have the right to end their employment and that they disputed the entire process and outcome. While it is clear the Taxpayer was displeased with the Employer's decision to terminate their employment, they have not provided any evidence of a 'genuine dispute' regarding the process and outcome. Obtaining legal advice in relation to the termination of employment does not in itself show that there was a dispute. It would be common for someone in a situation similar to the Taxpayer to seek legal advice to ensure the terms of their separation were reasonable. By entering in the Deed, the Taxpayer has in fact agreed to the terms relating to the termination of their employment. As the Taxpayer has not provided evidence of a genuine dispute, this condition is not satisfied. Principally compensation for unfair dismissal The Taxpayer has contended that their dismissal was unlawful as it was not due to any of the clauses outlined in the Employment Agreement under summary termination by the Employer. In spite of this, the Employment Agreement did not imply a finite period of employment and did not contain any clause pertaining to regular termination of employment by the Employer. It is generally accepted under common law where a contract of employment has no agreed duration and makes no provision for termination, it is implied that the contract may be terminated upon reasonable notice being provided. In support of this view, Byrne v Australian Airlines (1995) 185 CLR 410 at 450 summarised that: …at common law a contract of employment for no set term is to be regarded as containing an implied term that the employer give reasonable notice of termination except in circumstances justifying summary dismissal. The Taxpayer was informed via letter of their impending termination. As per the Deed, a termination date agreed, and a payment was made by the Employer reflecting 12 months' total remuneration. The Taxpayer has not demonstrated that the termination of their employment was unlawful or unfair. Furthermore, it is clear from the terms of the Deed that the payment is not principally compensation for unfair dismissal. Accordingly, this condition has not been satisfied. Exceeds amount on voluntary termination Under the terms of the Taxpayer's employment agreement, it is unlikely the Taxpayer would have received the payment if they voluntarily terminated their employment. Therefore, this condition is satisfied. Conclusion As the payment does not meet all of conditions under subsection 82-10(6) of the ITAA 1997, it cannot be excluded from the whole-of-income cap. Therefore, the whole of income cap will apply to the employment termination payment.