Private ruling: Lump sum payments
Date of advice: 17 December 2024
Published: 28 January 2025
Date scheme commenced: The scheme commenced on DD MM YYYY

Ruling: A1: No. This private ruling applies for the following period DD MM YYYY The scheme commenced on: The scheme commenced on DD MM YYYY

Relevant facts and circumstances: On DD MM YYYY, you were appointed as co-director of Entity 1, an Australian non-profit institute set up by Entity 2, a US-based company. On DD MM YYYY, you and the director of Entity 3, Person xx, signed an offer letter confirming your employment appointment. The letter states that you will be 'the inaugural Co-Director of our Australian non-profit institute, and it will commence on DD MM YYYY'. On DD MM YYYY, you issued an invoice to xx of Entity 2 for payment relating to your duties as executive director of Entity 1. You have provided a bank statement showing a payment of $xx received on DD MM YYYY from Entity 2 with the notation 'executive director invoice'. You have provided a copy of a Memorandum Of Understanding (MOU) made on DD MM YYYY. This MOU was signed by you (as an executive director of Entity 1) and xx. The MOU was also signed by xx as director of Entity 4. The parties to the MOU were Entity 1 and Entity 4. You have provided an employment contract dated DD MM YYYY, confirming your employment with Entity 1, in the role of Executive Director. Your income tax return for the 20YY income year reported gross income of $xxx,xxx from Entity 1. Your income tax return for the 20YY income year reported gross income of $x,xxx, from Entity 1. On DD MM YYYY, you signed a 'Deed of Settlement, Release, Assignment and Licence' (the Deed). The parties to the Deed were Entity 4, Entity 1, and you and xxx, as directors of Entity 1. Under clause 5.1 of the Deed, Entity 4 agreed to pay you an amount of $xxx,xxx upon receipt of an invoice from Entity 1. On DD MM YYYY, the Deed was executed, and Entity 4 paid you the above amount, following the signing of the Deed. This amount was shown on your 20YY income tax return as 'Other income category 4', with no description. Under the heading 'Background', the Deed states: The parties have differing views on the effect and operation of separate offer letters dated DD MM YYYY 20YY, addressed to each of Person xx (you) and Person xx (each a Director ) (and each an Offer Letter ), and a Memorandum of Understanding ( MOU ) dated DD MM YYYY between Entity 4 and Entity 1. Entity 1 and the Directors claim, and Entity 4 denies, that each Offer Letter established an employment relationship between Entity 4 and the Director to whom such Offer Letter was addressed. On DD MM YYYY, you applied for a private binding ruling. Following requests from us, you provided the following additional information: • In addition to the payment of $xxx,xxx the subject of this ruling, you received the following payments from Entity 1 and their associated entities: - Payment for the first month salary was made directly from Entity 2 after an invoice was provided - Salary payments (usual PAYG) (including the $xx,xxx sign-on bonus specified in the offer letter) were made via the non-profit institute that Entity 2 setup (Entity 1) between MM YYYY and MM YYYY. • The payment of $xxx,xxx was made (you believe) by Entity 4,, not through Entity 1. • You did not sign a separate employment contact with Entity 2 or Entity 1, only the Offer Letter. • Entity 1 was established via Entity 2 and Entity 2 was a member of Entity 1. In your individual capacity, you were to have a consulting arrangement as a XXXXX Advisor, in which you would receive stock options in Entity 1, but this arrangement did not occur and no such options were ever granted. • No other invoices were issued by Entity 1 to Entity 4, other than those referenced in the Deed, dated DD MM YYYY. • Entity 2 engaged xxxxxxx to set up Entity 1. They were remunerating xx to act as a director and company secretary of Entity 1. xx was also a director of Entity 4. • At incorporation, Entity 1 had only one member, xxxxxx, which had the power to remove directors and add others. This gave Entity 2 xx full control of Entity 1. • The reason you received salary and wages from Entity 1 after the Deed was signed is that you signed a new employment agreement directly with Entity 1 (you had previously only had an employment agreement with Entity 1) in MM YYYY. Some small wage payments were made under this new agreement in MM and MM YYYY. • You do not know why the payment from Entity 4 Australia was not reported as an employment termination payment. You also provided the following additional documentation: • Unsigned 'Deed of Settlement, Release, Assignment and Licence', between you, xx, Entity 4 and Entity 1. • Memorandum of Understanding, dated DD MM YYYY, between parties Entity 1 and Entity 4 (the Partner), signed by you and xx as Executive Directors of Entity 1 and xx as director of Entity 4 • xx bank statement showing receipt of a payment of $xxx,xxx on DD MM YYYY. The notation refers to a termination payment, and an effective date of DD MM YYYY. • Bank statements showing the other payments made to Entity 1 by Entity 4 • Employment Contract dated DD MM YYYY, between you and Entity 1, confirming your employment with Entity 1 effective DD MM YYYY and ending DD MM YYYY.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-130 | 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 Section 82-135 Summary: | The lump sum payment you received is not considered to be an employment termination payment as it does not meet the tests contained in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997). Detailed reasoning | Section 82-130 of the 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;...,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. | A payment is an ETP if it satisfies all the above requirements in section 82-130 of the ITAA 1997. | Payment is made in consequence of the termination of employment | The first consideration under subparagraph 82-130(1)(a)(i) of the ITAA 1997 is whether the payment is made 'in consequence of' the termination of employment. | The phrase 'in consequence of the termination of employment' is not defined in the legislation but has been considered by the Commissioner. | 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, 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. | If a 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. | Based on ATO records, you have never been employed by Entity 4, the entity who made the payment in question. | Entity 4 have not reported to the ATO any ETPs, or other taxable payments made to you. | You have provided an employment contract with Entity 1, but there is no evidence of such an agreement with Entity 4. | You reported receiving income from Entity 1 in both the 20YY and 20YY income years. | The MOU provided is between Entity 1 and Entity 4, as the 'partner'. | The payment is not a termination payment as the MOU is between entities involved in the partnership and your employment continued under this partnership, with your employment being with Entity 1. | Based on the facts and evidence provided, you have not been employed by Entity 4, the entity that made the payment. As such, the payment of $xxx,xxx could not be made in consequence of the termination of employment. | As the first test under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has not been satisfied, the lump sum payment of $xxx,xxx paid by Entity 4a cannot be an employment termination payment. However, for completeness, we have addressed the remaining requirements below. | Payment received more than 12 months after termination | Paragraph 82-130(1)(b) requires a payment to be received no later than 12 months after the termination of employment, subject to certain exceptions. | The payment in question was made to you on DD MM YYYY. However, we are unable to establish when your employment (if any) was terminated. | Not a payment mentioned in section 82-135 of the ITAA 1997 | Paragraph 82-130(1)(c) states a payment is an employment termination payment if it is not a payment mentioned in section 82-135. | 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, capital payments for or in respect of personal injury, as well as other types of payments which do not apply to your settlement payment. | There is no evidence that the payment was a payment mentioned in section 82-135.


Question:1: Is the lump sum payment of $xxx,xxx you received as a result of a settlement, an employment termination payment (ETP) as defined in subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?