Private ruling: Income tax - CGT payable on a settlement sum
Date of advice: 26 November 2018
Published: March 2019
Ruling period: Income year ending 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Will income tax be payable on the settlement sum referred to in the attached Release and Discharge Agreement? | A1: Yes | Q2: Will capital gains tax be payable on the settlement sum referred to in the attached Release and Discharge Agreement? | A2: No

Relevant facts and circumstances: 1. You were employed by XYZ Financial Institution. 2. You resigned from your employment with XYZ Financial Institution in December 2017. 3. You submitted a claim for compensation asserting that you suffered a psychiatric injury as a result of workplace bullying and subsequent unreasonable treatment by XYZ Financial Institution. 4. Your claim was rejected by the Corporation in Australia (via their claims agent ABC Services) by way of determination dated April 2018. 5. You filed an application for review with a state Employment Tribunal. 6. XYZ Financial Institution denied that it had any liability to you in respect of the application for review or in respect of the allegations of workplace bullying and subsequent unreasonable treatment. 7. You and the XYZ Financial Institution agreed to settle the claim and your differences under the terms of the Release and Discharge Agreement (Agreement). 8. XYZ Financial Institution will pay you the sum of $000 ex gratia within seven days of receiving a duly executed copy of the Agreement, which is dated in August 2018. 9. Under clause 2.1 of the Agreement you acknowledge that XYZ Financial Institution pays the settlement sum in full settlement of all claims against XYZ Financial Institution arising from the allegations made by you. The Agreement must not be interpreted as an admission by XYZ Financial Institution of liability to you for any matter. 10. Under clause 2.2 you release absolutely and discharge XYZ Financial Institution from all claims, actions, suits, causes of action, demands, liability, damages and costs arising in any way from the allegations of workplace bullying and subsequent treatment that you have now or may have had in the future if the parties had not executed the Agreement. 11. Under clause 2.4 you acknowledge that XYZ Financial Institution has no obligation pursuant to section 18 of the Return to Work Act 2014 to offer you suitable employment.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 82-130 | Income Tax Assessment Act 1997 section 82-135 We followed these ATO view documents | Taxation Ruling 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' | Case law | Federal Court in Dibb v. FC of T | Le Grand v. Commissioner of Taxation | Re Luke and Federal Commissioner of Taxation [2011] AATA 801; (2011) 2011 ATC 10-216

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Detailed Reasoning - Detailed reasoning: 12. A payment is an employment termination payment (ETP) if it satisfies all the requirements in section 82-130 of the ITAA 1997 and is not specifically excluded under section 82-135 of the ITAA 1997. 13. 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 the termination (but see subsection (4)); and (c) it is not a payment mentioned in section 82-135. | Detailed Reasoning - Paid ‘in consequence’ of the termination of employment: 14. The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Taking into account the courts decisions on the meaning of the phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are set out in Taxation Ruling 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' . 15. Paragraphs 5 and 6 of TR 2003/13 state that: 5....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. 16. At paragraph 32 of TR 2003/13 the Commissioner considers payments from a former employer to settle litigation: 32. The Federal Court in Dibb v. FC of T 1 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.’ 17. The payments in these cases were ETPs because there was a sequence of connected events following the termination which ultimately led to the payment. The payments would not have been made but for the termination. 18. In this case, after resigning from your employment you filed an application with an Employment Tribunal to review your unfavourable worker’s compensation decision. You and XYZ Financial Institution agreed to settle the claim and your differences under the terms of the Release and Discharge Agreement. Your payment was to settle any claim for psychiatric injury as a result of workplace bullying and subsequent unreasonable treatment by XYZ Financial Institution. 19. While the settlement of the legal proceedings is a direct cause of the payment, the proceedings in respect of the psychiatric injury claim were commenced by you as a result of the termination of your employment. That is, there was a sequence of events following the termination which had a relationship and connection which ultimately led to the settlement payment - the termination, worker’s compensation claim, legal proceedings and payment were all intertwined. 20. Therefore, it is considered that the settlement payment was received by you in consequence of the termination of your employment with XYZ Financial Institution as per paragraph 82-130(1)(a) of the ITAA 1997. | Detailed Reasoning - The payment is received no later than 12 months after termination: 21. The Agreement stipulates that XYZ Financial Institution will pay you the sum of $000 ex gratia within seven days of receiving a duly executed copy of the Agreement, which is dated in August 2018, meaning the payment will be made within 12 months of the termination. 22. Subsequently, the settlement payment will satisfy the requirements of paragraph 82-130(1)(b) of the ITAA 1997. | Detailed Reasoning - Exclusions under section 82-135 of the ITAA 1997: 23. Section 82-135 of the ITAA 1997 provides that certain payments are not ETPs, including: ● unused annual leave and unused long service leave payments ● genuine redundancy and early retirement scheme payments up to the tax-free limit ● capital payments for personal injury as compensation for your inability to be employed 24. In Re Luke and Federal Commissioner of Taxation [2011] AATA 801; (2011) 2011 ATC 10-216; the Administrative Appeals Tribunal (AAT) accepted that the taxpayer had been adversely affected by what they perceived to be unreasonable harassment and discrimination in their employment, but said that 'personal injury' does not extend 'beyond physical injury and mental illness to include emotional hurt'. The AAT added that: Evidence is required that the payment had some form of identifiable and unambiguous connection with a personal injury, for which compensation was necessary as a reflection of the fact that the applicant's capacity to derive income from personal exertion had been impaired. 25. In view of the above, a physical and/or mental injury would require diagnosis by a qualified medical practitioner to fall within the meaning of 'personal injury'. The payment must also be calculated by reference to the nature of the injury and the extent to which the injury will affect your capacity to derive income from employment. 26. Although the settlement payment relates to your claim for psychiatric injury, XYZ Financial Institution has denied any liability to the allegations and you have released them from all claims relating to the matter. The Agreement does not provide any medical qualification or clarification that the payment was calculated with regard to your likely loss of income producing capacity. 27. Therefore, in accordance with paragraph 82-130(1)(c) of the ITAA 1997, the payment is not for, or in respect of, personal injury which would be excluded from being an ETP under section 82-135. | Detailed Reasoning - Conclusion: 28. The payment from your employer in settlement of litigation proceedings is an ETP in accordance with section 82-130 of the ITAA 1997. 29. Capital gains tax is not payable in respect of the settlement sum referred to in the Release and Discharge Agreement? | Detailed Reasoning - Relevant legislative provisions: Income Tax Assessment Act 1997 section 82-130 Income Tax Assessment Act 1997 section 82-135 | Detailed Reasoning - We followed these ATO view documents: Taxation Ruling 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' | Detailed Reasoning - Case law: Federal Court in Dibb v. FC of T Le Grand v. Commissioner of Taxation Re Luke and Federal Commissioner of Taxation [2011] AATA 801; (2011) 2011 ATC 10-216

Reasons for decision: These reasons for decision accompany the Notice of private ruling for a taxpayer.