Private ruling: Employment termination payment
Date of advice: 28 January 2025
Published: 24 March 2025
Ruling period: 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Is the payment made to you under a deed of release assessable as an employment termination payment (ETP) as defined in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: On XX/XX/XXXX, you commenced employment with your former employer. On XX/XX/XXXX, whilst employed by your former employer, you sent an email, requesting a formal investigation into concerns you held regarding your treatment as an employee. On XX/XX/XXXX, you sent a letter to your former employer, outlining what you believed to be unacceptable treatment, and noting that you are open to reaching a settlement in relation to your claims. The letter referenced a gradual deterioration in your mental health, that you understood your former employer had engaged a law firm, and that you had not been made aware of any action taken by your former employer to address the concerns you had raised. On XX/XX/XXXX, a letter was issued to you by a representative of your former employer, making you an offer of settlement. You provided an email thread covering the period XX/XX/XXXX to XX/XX/XXXX, containing details of negotiations with your former employer's legal representation. Included in these emails were: • A rejection of a settlement offer made by you • An alternative settlement proposal On XX/XX/XXXX, you sent an email to your former employer's legal representation, advising you were prepared to accept a total payment of $X,XXX,XXX, inclusive of a payment in lieu of four weeks' notice, subject to adjustments, which included making a tax-free payment to your bank account. You advised that, were your terms accepted, you were prepared to sign the deed, and finalise your resignation. On XX/XX/XXXX, your former employer's legal representative advised that no payment made to you could be treated as tax-free. On XX/XX/XXXX, you signed the deed. On XX/XX/XXXX, your former employer's representative signed the deed. On XX/XX/XXXX, you were paid an amount of $X,XXX,XXX, less $XXX,XXX tax.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-130 | Income Tax Assessment Act 1997 Section 82-135 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: The payment is an ETP. It is not excluded from being an ETP as a payment for, or in respect of, personal injury. | Detailed Reasoning - Employment termination payment: Section 995-1 of the ITAA 1997 states that: employment termination payment has the meaning given by section 82-130 of the ITAA 1997. Subsection 82-130(1) of the ITAA 1997 states that: 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. In order for the $X,XXX,XXX payment made to you under the deed to constitute an employment termination payment, all the conditions in section 82-130 of the ITAA 1997 will need to be satisfied. Failure to satisfy any of the conditions will result in the payment not being considered an employment termination payment. Furthermore, any termination payments received outside of the 12 months are taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12-month rule. | Detailed Reasoning - Payment is made in consequence of the termination of employment: It should be noted that the phrase 'in consequence of the termination of employment' is not defined in the legislation. However, both the Courts and the Commissioner have considered the meaning of this phrase. In light of these decisions, the Commissioner discusses the meaning of the phrase in Taxation Ruling TR 2003/13 Income tax: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13). In paragraph 5 of TR 2003/13, the Commissioner states: ...... 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. As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be: ...... 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. The phrase 'in consequence of the termination of employment' has been interpreted by the Courts in several cases. Of note are the decisions made by the High Court in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 ( Reseck ) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325( McIntosh ). In Reseck, Justice Gibbs stated: Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination...It is not in my opinion necessary that the termination of the services should be the dominant cause of the payment. Justice Jacobs stated: It was submitted that the words "in consequence of" import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a "following on". In looking at the phrase 'in consequence of', the Full Federal Court in McIntosh considered the decision in Reseck . Justice Brennan considered the judgments of Justice Gibbs and Justice Jacobs in Reseck and concluded that their Honours were both saying that a causal nexus between the termination and payment was required, though it was not necessary for the termination to be the dominant cause of the payment. Both Courts' views were that for a payment to be made in consequence of the termination of employment, it had to follow on as a result or effect of the termination of employment. Additionally, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient. Furthermore, in Le Grand v Federal Commissioner of Taxation [2002] FCA 1258; (2002) 124 FCR 53; (2002) 195 ALR 194; (2002) 2002 ATC 4907; (2002) 51 ATR 39, the issue before the court was whether an amount received by the applicant as a result of accepting an offer of compromise in respect of claims brought by him against his former employer, in relation to the termination of his employment, was in whole, or in part, an ETP. It was held that a settlement payment for litigation in relation to a taxpayer's dismissal was an ETP. Justice Goldberg stated: I am satisfied that there is a sufficient connection between the termination of the applicant's employment and the payment to warrant the finding that the payment was made in consequence of the termination of the applicant's employment. I am satisfied that the payment was an effect or result of that termination in the sense that there was a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment. Justice Goldberg concluded that the test for determining when a payment is made in consequence of the termination of employment is that which was articulated by Justice Gibbs in Reseck . Thus, for the payment to have been made in consequence of the termination of employment, the payment must follow as an effect or result of the termination of employment. As earlier stated in paragraph 6 of TR 2003/13, there must be 'a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment'. The Full Federal Court in Dibb v Federal Commissioner of Taxation [2004] FCAFC 126; (2004) 207 ALR 151; (2004) 2004 ATC 4555; (2004) 55 ATR 786, has applied the above decisions in finding that the payment received by the taxpayer under a deed of release to settle various causes of action against the employer, following the termination of employment, was an ETP. The essence of this analysis is that, if the payment follows as an effect of, or a result from, the termination of employment, the payment will be made in consequence of the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. The termination of the payment need not be the sole or dominant cause of the payment. Whether a payment is received in consequence of the termination of employment is determined by the relevant facts and circumstances of each case. In your case, it is considered that the payment was received in consequence of the termination of your employment. This is because, having determined that you would no longer be able to continue to work for your employer because of the effect your employment had on your health and wellbeing, you entered into settlement negotiations with them, ultimately leading to making the agreement to receive the payment. Under Recital X of the deed, you agreed to resign with effect on the date that the deed was made. Under subclause X.X of the deed, your former employer agreed to make the payment within seven days of the resignation date. There is therefore a direct link between the termination of your employment and the payment being received. But for your employment ending, you would have had no entitlement to the payment. The termination of employment and the payment are intertwined and connected. The payment is considered to be received by you in consequence of the termination of your employment. Therefore, the requirement of subparagraph 82-130(1)(a)(i) of ITAA 1997 has been met. | Detailed Reasoning - Payment received more than 12 months after termination: Paragraph 82-130(1)(b) of the ITAA 1997 requires that the payment must be received no later than 12 months after the termination of employment. Your employment terminated on XX/XX/XXXX. The payment was made on XX/XX/XXXX, within 12 months of that date, satisfying the second condition under paragraph 82-130(1)(b) of the ITAA 1997. | Detailed Reasoning - Not a payment mentioned in section 82-135 of the ITAA 1997: Certain payments made on termination of employment are excluded from being an employment termination payment under section 82-135 of the ITAA 1997. These payments include any accrued annual and long service leave, the tax-free parts of a genuine redundancy payment or an early retirement scheme payment, and other types of payments which do not apply to your situation. Under section 82-130(1) of the ITAA 1997, consideration must be given to whether the specific exemption for personal injury in paragraph 82-135(i) of the ITAA 1997 (payments that are not employment termination payments) applies. This subsection states that employment termination payments do not include: (i) a capital payment for, or in respect of, personal injury to you so far as the payment is reasonable having regard to the nature of the personal injury and its likely effect on your capacity to derive income from personal exertion (within the meaning of the definition of income derived from personal exertion in subsection 6(1) of the Income Tax Assessment Act 1936 ); This exclusion is for a payment or benefit that compensates or reimburses a person for, or in respect of, the particular injury. In Commissioner of Taxation (Cth) v. Scully (2000) 201 CLR 148; [2000] HCA 6; (2000) 2000 ATC 4111; (2000) 43 ATR 718 the High Court held that compensation must be calculated by reference to the nature and extent of the injury or likely loss to the taxpayer. The payment in this case was not in respect of personal injury, acting Chief Justice Gaudron and Justices McHugh, Gummow and Callinan stating in their joint decision: In our opinion, the payment in this case cannot be characterised as consideration... in respect of, personal injury. The fact that the payment is not calculated by reference to the nature and extent of the injury or likely loss to the respondent and the fact that the other benefits are similar to that for total and permanent disablement point inevitably to the conclusion that the payment was consideration... for, or in respect of the respondent's termination of employment and her rights under the Trust Deed and was not consideration... for, or in respect of her injury. In the Administrative Appeals Tribunal (AAT) decision AAT Case 11,722 (1997) 35 ATR 1114; (1997) 97 ATC 258, a taxpayer negotiated a settlement with their past employer by agreeing to be paid a certain amount, also to forgo all past, present and future claims against the employer, except for personal injury. Senior Member Dwyer ruled that, given the 'exception' in the settlement clause, no amount of the settlement could be for personal injury. Therefore, the ETP exclusion provisions could not apply to the amount. There are three types of injury that a person can receive: (a) behavioural injury - one that involves physical injury (internal and/or external) and/or mental illness that is clearly discernible to a qualified medical practitioner; (b) non-behavioural injury - hurt, distress, anxiety, etc., that flows from the death of, or serious injury to, a relative or close friend; wrongful dismissal; defamation; etc. This type of injury may have legal remedies under the law of torts (e.g., defamation, slander), statute (e.g., sexual harassment, discrimination), or contract (e.g., employment, professional negligence); and (c) property injury - damage to a person's property. Notwithstanding it may be said that all three types of injury may be personal, it is considered that only the first type (i.e. behavioural injury) falls within the meaning of the term personal injury. The reasoning above is based on the decision by the Victorian Supreme Court in Graham v. Robinson [1992] 1 VR 279 ( Graham v. Robinson ), where the Court had to decide if emotional hurt (i.e. hurt, distress, public scandal, hatred, odium, ridicule and contempt) was a personal injury. At 281, Justice Smith stated: In the absence of express authority, I have come to the conclusion that the expression personal injury does not extend beyond physical injury and mental illness to include emotional hurt. I am encouraged to this view by the fact that the law has rejected grief or sorrow as a form of injury which can be relied on to mount a claim in negligence: Mount Isa Mines Ltd. v. Pusey (1970) 125 CLR 383, at p. 394 and Jaensch v. Coffey (1984) 155 CLR 549, at p. 587. It is true that damages are awarded for pain and suffering in the typical personal injury case. They are awarded, however, where pain and suffering flow from and are connected with physical or mental injury and may therefore be said to be damages in respect of personal injury. The decision in Graham v. Robinson was applied in the AAT decision McMahon v. Commissioner of Taxation Case [1999] AATA 5; (1999) 41 ATR 1056; (1999) 99 ATC 2025 ( McMahon ) in relation to a payment for alleged damage to a taxpayer's reputation. In McMahon, a critical performance appraisal of the taxpayer and other comments were published in the media. Subsequent to this, the taxpayer's employment was terminated and it was agreed to pay him certain amounts including an amount for the alleged damage to his reputation. Senior Member Block stated: The Tribunal also notes the stipulation in the concluding portion of s. 27A(1)(n) of the Act that the amount of consideration for personal injury is to be regarded as an ETP only to the extent that it is reasonable having regard to the nature of the injury and the taxpayer's capacity to derive income from personal exertion. The Tribunal considers that the inclusion by the legislature of the words "from personal exertion" tends to confirm that the section is intended to exclude from the definition of ETP payments in respect of injuries to the person, where such injuries being physical injuries or mental illnesses which have an assessable and identifiable impact on the capacity of the taxpayer to earn income. The Tribunal considers in summary that an injury to person is distinguishable from an injury to a person's reputation. For the Reasons set out previously, (and bearing in mind that the decision in Graham v. Robinson is binding on the Tribunal), the reputation payment was not made in respect of personal injury within s. 27A(1)(n) of the Act which does not operate to exclude it from the provisions of s. 27A of the Act; accordingly the reputation payment was correctly assessable as an ETP. To reiterate, there must be a 'behavioural'-type personal injury. From the above cases, the term 'personal injury' is limited to physical and/or mental injury. In your application, you have made statements, and provided documentation, to support a view that your mental health suffered because of actions taken by your former employer, and the pressure placed upon you by such actions. You have provided a copy of a Psychological Report dated XX/XX/XXXX, in which your psychologist confirms symptoms experienced by you. It seems, from the documentation provided, that you suffered a personal injury. However, the deed makes no reference to such an injury. Further, the payment of $X,XXX,XXX was not calculated with any reference to the nature or extent of such an injury. No attempt was made by your former employer to place a monetary value on a specific injury suffered, nor to quantify the likely loss in your income-earning ability as a result of such an injury. Therefore, it cannot be a capital payment for, or in respect of, personal injury, pursuant to paragraph 82-135(i) of the ITAA 1997. Therefore, in accordance with paragraph 82-130(1)(c) of the ITAA 1997, the payment is not a capital payment for, or in respect of, personal injury, which would be excluded from being an ETP under section 82-135. None of the other exclusions in section 82-135 of the ITAA 1997 apply to the payment, to exclude it from being an ETP. Therefore, the third condition in paragraph 82-130(i) has been satisfied. Accordingly, as all of the conditions under subsection 82-130(1) have been satisfied, the payment is an ETP. | Detailed Reasoning - Conclusion: As the payment of $X,XXX,XXX made to you was paid in consequence of the termination of your employment, was received no later than 12 months after that termination, and was not a payment under section 82-135 of the ITAA 1997, this payment is an ETP.