Private ruling: Employment termination payments
Date of advice: 26 November 2018
Published: February 2019
Ruling period: Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

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

Relevant facts and circumstances: The Taxpayer commenced employment with their former employer (the Employer) in the first quarter of the 20XX-XX income year. In the final quarter of the 20XX-XX income year, the Taxpayer’s employment was terminated by the Employer. The Taxpayer disputed the Employer’s right to terminate their employment contending that termination was unfair and without proper grounds and in breach and repudiation of their employment contract. The Employer denied the Taxpayer’s allegations in regard to the termination. Subsequently, without admission of any liability, the Taxpayer and Employer agreed to settle all matters arising from the allegations without admission of any liability under a Deed of Settlement (the Deed). Relevantly, the terms of the Deed include the following: ● The Employer agrees to characterise the cessation as a resignation should the Taxpayer elect so in writing. ● The Employer will pay to the Taxpayer an Employment Termination Payment (ETP) (less applicable taxation). ● The Taxpayer will be responsible for applicable taxation with respect to the ETP which will be withheld from the sum paid to the Taxpayer. ● The Taxpayer acknowledges and agrees that the payments are in full and final satisfaction of all obligations owed to the Taxpayer, and in full settlement of all claims against the Employer. ● The Taxpayer releases and discharges the Employer from all claims which the Employee has or but for the execution of this Deed may have had in relation to or arising out of the agreed matters, save for any statutory workers compensation claims. ● The Employer releases and discharges the Taxpayer from all claims which the Employer has or but for the execution of this Deed may have had in relation to the Agreed Matters.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 82-10 | Income Tax Assessment Act 1997 Subsection 82-10(1) | Income Tax Assessment Act 1997 Subsection 82-10(2) | Income Tax Assessment Act 1997 Subsection 82-10(3) | Income Tax Assessment Act 1997 Subsection 82-10(4) | Income Tax Assessment Act 1997 Subsection 82-10(5) | Income Tax Assessment Act 1997 Subsection 82-10(6) | Income Tax Assessment Act 1997 Paragraph 82-10(6)(d) | Income Tax Rates Act 1986 Schedule 7

Reasons for decision: Summary: The employment termination payment to be received by the Taxpayer as a result of the termination of their employment is not an excluded payment as defined in paragraph 82-10(6)(d) of the ITAA 1997. Therefore, the whole-of-income cap applies to the payment. | Detailed Reasoning - Detailed reasoning: The taxation of life benefit termination payments is outlined in section 82-10 of the ITAA 1997. A ‘life benefit’ termination payment is an ETP received by a person in consequence of the termination of that person's employment. For tax purposes, it may consist of two components: ● a tax free component, and ● a taxable component Subsection 82-10(1) of the ITAA 1997 states that the ‘tax free component’ of a life benefit termination payment is not assessable income and is not exempt income. In accordance with subsection 82-10(2) of the ITAA 1997, the ‘taxable component’ of a life benefit termination payment is assessable income. However, in accordance with subsection 82-10(3) of the ITAA 1997, a tax off set applies to ensure that the rate of income tax on the amount mentioned in subsection (4) of the ITAA 1997 does not exceed: (a) if you are your * preservation age or older on the last day of the income year in which you receive the payment-15%; or (b) otherwise-30%. *To find definitions of asterisked terms, see the Dictionary, starting at section 995-1. Subsections 82-10(4) and (5) of the ITAA 1997 outline how the relevant amount is worked out. According to these subsections, the amount is either: a. the ‘ETP cap amount’ (being $205,000 in the 2018-19 income year) reduced by the amount of any earlier ETPs received in the same income year, or b. the lessor of: i. the ETP cap amount (reduced by the amount of any earlier ETPs received in the income year); and ii. the ‘whole-of-income cap amount’ (being $180,000 reduced by any other taxable income earned throughout the income year). In accordance with Schedule 7 of the Income Tax Rates Act 1986 , any part of the taxable component that exceeds the ETP cap amount (the ‘employment termination remainder’) is taxed at the top marginal rate. | Detailed Reasoning - Excluded payments: According to paragraph 82-10(6)(d) of the ITAA 1997, the whole-of-income cap does not apply to certain termination payments. These payments are known as ‘excluded payments’ and relevantly include payments 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. We accept that a genuine dispute, as contemplated by paragraph 82-10(6)(d) of the ITAA 1997, concerning the Taxpayer’s termination did exist between the Taxpayer and the Employer, and that the employment termination payment was made to the Taxpayer in connection with that dispute. However, we do not accept that the payment was made principally as compensation for unfair dismissal as contemplated by paragraph 82-10(6)(d) of the ITAA 1997. Our view is based on the following: ● The Taxpayer agreed to the terms of the Deed in which allegations of unfair dismissal made by the Taxpayer were denied by the Employer; ● The Deed makes it clear that the Taxpayer unconditionally releases and forever discharges the Employer from all claims, and vice versa; ● It is not clear from the Deed whether the termination was to be treated as resignation or dismissal; ● No documentary evidence has been provided in relation to the termination of employment being unlawful or unfair; ● It is clear from the terms of the Deed that the payment is not principally compensation for unfair dismissal; and ● The Deed states that, following the termination, the agreed sum is to be paid to the Taxpayer in respect of all entitlements arising on termination of employment. As the employment termination payment does not meet all of the conditions under paragraph 82-10(6)(d) of the ITAA 1997, it is not an excluded payment for the purposes of paragraph 82-10(6)(d) of the ITAA 1997. Therefore the whole-of-income cap applies to the employment termination payment.