Private ruling: Assessable income - employment termination payment
Date of advice: 6 October 2023
Published: 20 November 2023
Ruling period: Income year ended 30 June 20XX.
Date scheme commenced: 1 July 20XX.

Ruling: Q1: Is the lump sum payment (the Compensation Payment) paid by Company A to you (the taxpayer), under the terms of a ' Settlement and release agreement' subject to taxation as an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. The Payment is an ETP.

Relevant facts and circumstances: 1. The taxpayer was employed by Company X for some years when they had been employed in various roles. 2. The taxpayer attended a virtual meeting (the Meeting) with their manager to discuss key performance targets for the year. During the meeting the taxpayer was asked by their manager about their career progression options and if they had any thoughts about their role in the business. Taxpayer's response to this question was that they would like to be considered for their manager's role if it ever became vacant. The taxpayer enquired as to what gaps existed in their experience and capabilities so that they could work on those items over the next several months and years. 3. The taxpayer's line manager indicated that it was their view that the taxpayer would never have the manager role, that they couldn't see a future for the taxpayer in the business, and that they would like to see the taxpayer leave, either then or at some point over a specified number of months. 4. The manager explained their rationale for this view, being that: (a) The taxpayer had been in their role for about some years, he was a mature employee, and they wanted to create growth opportunities for younger talent in the team; and (b) The taxpayer had previously expressed a view that they did not want to move overseas for their next role. 5. According to the manager, their view about the taxpayer's future in the business had nothing to do with their work performance, which had been exemplary, but that the taxpayer had simply reached their full potential and moving them on was necessary to create growth opportunities for younger talent in the business. 6. The taxpayer was not offered any emotional support either during or after the Meeting, nor offered any time off to process what had been communicated during the meeting. 7. Over the next few months, the taxpayer became increasingly distressed, anxious and depressed, with the taxpayer seeking medical assistance from their general practitioner as well as a psychologist. 8. Following the Meeting and the ongoing actions of Company X, the taxpayer had several claims against Company X, including in respect of personal injury (Claims). 9. During several discussions the taxpayer had with their employer over the ensuing months, it was made clear to the taxpayer that they were either to find an amicable settlement to all matters (including their resignation) otherwise their employment would be terminated without cause and their only option would be for them to formally initiate legal proceedings against their employer. The taxpayer decided that a negotiated outcome was preferred. 10. The taxpayer entered into a Settlement and Release Agreement (Settlement Agreement) with their employer, Company X. 11. Company X and the taxpayer agreed to separate the agreement into two components. The first component being payments in return for their termination of employment (the Cessation Payments), and the second component being a payment in return for the release of all claims against his employer (the Compensation Payment). 12. Company X and the taxpayer agreed to end the taxpayer's employment on a specified date with the Cessation Payment to include amounts relating to salary in lieu of notice, annual and long service leave and an amount in lieu of discretionary performance bonus. 13. Company X agreed to pay the taxpayer a specified amount in relation to the Compensation Payment in consideration of, and as compensation for, the release of the taxpayer's Claims. 14. Company X provided the taxpayer with a Payment Summary in which the Compensation Payment amount was referred to as a 'Termination Payment'. 15. Company X lodged and reported an Income Statement with the ATO for the income year covered by the ruling period which the taxpayer presumes had included the Compensation Payment amount as a component of a taxable ETP amount.

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

Reasons for decision: Summary: 16. Section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997) states: (1) A payment is an employment termination payment if: (a) it is received by you: i. in consequence of the termination of your employment; or ... (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. (2) A life benefit termination payment is an employment termination payment to which subparagraph (1)(a)(i) applies. ... (4) Paragraph (1)(b) does not apply to you if: (a) you are covered by a determination under subsection (5) ... (5) The Commissioner may determine, in writing, that paragraph (1)(b) does not apply to you if the Commissioner considers the time between the employment termination and the payment to be reasonable, having regard to the following: (a) the circumstances of the employment termination, including any dispute in relation to the termination; (b) the circumstances of the payment; (c) the circumstances of the person making the payment; (d) any other relevant circumstances .... | Detailed Reasoning - Employment termination payment (ETP): 17. A payment is an ETP if it satisfies all the above requirements in section 82-130 of the ITAA 1997 and is not specifically excluded under section 82-135 of the ITAA 1997. 18. The first consideration is whether the payment is made 'in consequence' of the termination of employment. | Detailed Reasoning - Paid 'in consequence' of the termination of employment: 19. 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' (TR 2003/13). 20. 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. 21. 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 their 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.' 22. 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. 23. In this case there was a dispute between the taxpayer and the employer with the taxpayer making several claims against Company X, including in respect of personal injury Claims. 24. The taxpayer and the employer agreed to settle the claims made against the employer with the acceptance of the Compensation Payment and the taxpayer would terminate their employment with Company X. 25. As per paragraphs 5 and 6 of TR 2003/13, it is clear that but for the termination of the taxpayer's employment, the amount received by the taxpayer under the Settlement Agreement would not have been paid. 26. While the settlement made is a direct cause of the payment, the payment would not have been made unless there had been a termination of employment. That is, there was a sequence of events leading to the termination of the taxpayer's employment which had a relationship and connection leading to the settlement payment. The causes of action settled under the Settlement Agreement are interwoven and intertwined with termination of employment. 27. Therefore, it is considered that the settlement payment was received by the taxpayer in consequence of the termination of employment, as per paragraph 82-130(1)(a) of the ITAA 1997. 28. The payment from the employer, the Compensation Payment, is an ETP in accordance with section 82-130 of the ITAA 1997. [1] (2003) 53 ATR 290