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1 Is any part of the payment you will receive under the Deed of Release and Discharge an employment termination payment (ETP) under section 82-130 the Income Tax Assessment Act 1997 (ITAA 1997)?

1 Yes. Question 2 Is any part of the payment a tax-free part of a genuine redundancy payment under section 83-170 of the ITAA 1997? Answer 2 No. Question 3 Is a capital gain that arises from the payment disregarded under subsection 118-37(1) of the ITAA 1997? Answer Not applicable This ruling applies for the following periods: Year ending 30 June 20YY Year ending 30 June 20YY The scheme commenced on: 1 July 20YY

You were employed by a company. On DD MM 20YY, during your employment with the company, you believed that you experienced an injury. On DD MM 20YY, you lodged a claim for compensation for the injury. On DD MM 20YY, Company A rejected your claim for compensation. On DD MM 20YY, an application for review was filed with the State A Employment Tribunal. On DD MM 20YY, your employment ended with the company. You intend to enter a Deed of Release and Discharge (the deed) with the company where both parties will agree to the full and final settlement of all matter. The deed is currently in draft form. As per the deed, you will receive a settlement payment of $XXXX comprising of the following: •                 $XXXX as a contribution towards future vocational and re-training expenses •                 $XXXX described as for redundancy As per the deed, you agree to abandon any right now and forever to seek re-employment with the company. The settlement is conditional upon you and the company executing consent orders in the State A Employment Tribunal. You expect to receive the settlement payment within several weeks following receipt of the private ruling. Assumptions:

The deed will be executed in its current draft form, with the only additions being dates and signatures. You will receive the payment within 12 months from your employment ending date.

Income Tax Assessment Act 1997 section 82-130 Income Tax Assessment Act 1997 section 82-135 Income Tax Assessment Act 1997 section 83-170 Income Tax Assessment Act 1997 section 83-175 Income Tax Assessment Act 1997 section 118-37 Income Tax Assessment Act 1997 section 118-20 Income Tax Assessment Act 1997 section 118-22

Question 1 Employment termination payment A payment will be considered an employment termination payment (ETP) if it satisfies all the requirements in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997). 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. Payment received 'in consequence of' the termination of employment 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 is set out 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 ) . Paragraphs 5 and 6 of TR 2003/13 state that: 5. ... the Commissioner considers that 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. 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 received in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case. 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.'

A payment will be made 'in consequence of' the termination of employment, if there is a sequence of connected events following the termination, which ultimately leads to the payment being made. This may include legal action. If a payment would not have been made but for the termination, then the payment is made 'in consequence of' the termination. In this case, there was a dispute between you and the company for a claim of injury resulting from harassment. The matters were lodged with the State A Employment Tribunal. You and the company agreed to settle the claim under the terms of the deed. The payment is conditional upon executing consent orders in the State A Employment Tribunal.

While the settlement of the dispute is the direct cause of the payment, the dispute was commenced as a result of the claim and the termination of your employment. That is, there was a sequence of events following the termination which ultimately will lead to the payment being made under the deed. The termination, the dispute and the payment were all intertwined. The payment would not have been made but for the termination of your employment. Therefore, it is considered that the payment is expected to be received in consequence of the termination of your employment. As such, the requirement of subparagraph 82-130(1)(1)(i) of the ITAA 1997 is satisfied. Payment received no later 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. Subsection 82-130(4) of the ITAA 1997 states that: Paragraph (1)(b) does not apply to you if: (a)             you are covered by a determination under subsection (5) or (7) ... Subsection 82-130(5) of the ITAA 1997 states:

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. Subsection 82-130(7) states: The Commissioner may, by legislative instrument, determine that paragraph (1)(b) does not apply to either or both of the following, as specified in the determination: (a)             a class of payments; (b)             a class of recipients of payments. For this requirement to be met, the payment either has to be made within 12 months of the termination of employment, or subsections (5) or (7) must apply. In this case, your employment with the company was terminated on DD MM 20YY and the payment is assumed to be made within 12 months from this date.

Therefore, the requirement of paragraph 82-130(1)(b) of the ITAA 1997 is satisfied under this assumption. Payments mentioned in section 82-135 of the ITAA 1997 Paragraph 82-130(1)(c) of the ITAA 1997 specifies that an ETP does not include a payment mentioned in section 82-135 of the ITAA 1997. Some commonly considered exclusions under section 82-135 include: •                 a capital payment for, or in respect of, personal injury, so far as the payment is reasonable having regard to the nature of the injury and its likely effect on the capacity to derive income from personal exertion: subsection 82-135(i) •                 the tax-free part of a genuine redundancy payment: subsection 82-135(e) •                 lump sum payments for unused annual or long service leave: subsection 82-135(c) and subsection 82-135(d) Capital payment for personal injury In Re Luke and Federal Commissioner of Taxation

[2011] AATA 801; (2011) 2011 ATC 10-216; the 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. 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 would also have to be calculated by reference to the nature of the injury and the extent to which the injury would affect the capacity to derive income from employment. In this case,

•                 based on the deed, there is no finding that the payment is 'for or in respect of' personal injury or being calculated by reference to the nature and extent of the injury, in order to meet the requirements of subsection 82-135(i) of the ITAA 1997 •                 it is considered that there is no tax-free part of a genuine redundancy payment, as discussed below in question 2 •                 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 requirement of paragraph 82-130(1)(c) is satisfied. Conclusion Consequently, as all conditions in subsection 82-130(1) of the ITAA 1997 have been satisfied, the payment is an ETP. Question 2 Genuine redundancy payment Genuine redundancy payments are tax-free up to a limit worked out under section 83-170 of the ITAA 1997. The matter of what is a genuine redundancy payment is defined by section 83-175. The section identifies: •                 the conditions that must be satisfied for at least part of a payment to be treated as a genuine redundancy payment;

•                 how to work out what amount of the payment is a genuine redundancy payment; and •                 what payments are excluded from being a genuine redundancy payment A payment made to an employee is a genuine redundancy payment if it satisfies all the conditions set out in section 83-175 of the ITAA 1997. This section states: (1)             A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee's position is genuinely redundant and exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of dismissal. (2)             A genuine redundancy payment must satisfy the following conditions: (a)             the employee is dismissed before the earlier of the following: (i)               the day he or she turned 65; (ii)               (ii) if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service the day he or she would reach the age or complete the period of service (as the case may be);

(b)             (b) if the dismissal was not at arm's length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's length; (c)             (c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after dismissal. (3)             However, a genuine redundancy payment does not include any part of a payment that was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later time. Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments (TR 2009/2) outlines the Commissioner's view of the requirements to be satisfied before any payment made to a person whose employment is terminated qualifies for treatment as a genuine redundancy payment under section 83-175 of the ITAA 1997. Paragraph 10 of TR 2009/2 states that, under subsection 83-175(1), a genuine redundancy payment is one 'received by an employee who is dismissed from employment because the employee's position is genuinely redundant'.

Paragraph 11 of TR 2009/2 states that there are four necessary components within this requirement: •                 the payment being tested must be received in consequence of an employee's termination •                 that termination must involve the employee being dismissed from employment •                 that dismissal must be caused by the redundancy of the employee's position •                 the redundancy payment must be made genuinely because of a redundancy Component 1: payment 'in consequence of' termination This requirement has been covered above, under 'Employment termination payment'. Component 2: 'dismissal' from employment The Commissioner's view is that a genuine redundancy can only arise where there is no suitable job available for the employee with the employer, meaning that he or she must therefore be dismissed. Dismissal is a particular mode of employment termination. It requires a decision to terminate employment at the employer's initiative, without the consent of the employee. This stands in contrast to employment that is terminated at the initiative of the employee, for example in the case of resignation.

'Consent' in this context refers to the employee freely choosing to agree to, or approve, the act or decision to terminate employment, in circumstances where the employee has the capacity to make such a choice. Determining whether an employee has consented to their termination requires an assessment of the facts and circumstances of each case. Consent may be either expressly stated by the employee or implied by their behaviour or conduct. Where an employee is given notice from their employer that they will be terminated at a specified time in the future due to genuine redundancy, that employee will be dismissed because of redundancy for the purposes of section 83-175. Component 3: dismissal caused by 'redundancy' Section 83-175 further requires that the dismissal be caused by redundancy of the employee's position, and not for some other reason. The reason for a dismissal is to be established in light of the facts and circumstances of each case. The redundancy of the relevant position must be the prevailing or most influential reason for the dismissal if there is more than one contributing cause.

An employee's position is redundant when an employer determines that it is superfluous to the employer's needs and the employer does not want the position to be occupied by anyone. Accordingly, it is fundamentally the employer's decision that a position is redundant. On occasion, the decision may be unavoidable due to the circumstances surrounding the employer's operations. In some circumstances, an employer may reallocate the duties and functions attached to a particular position to another position within the employer's organisational structure. In such cases, the former position is redundant. Component 4: 'genuine' redundancy Contrived cases of redundancy will not meet the conditions in section 83-175. Whether a redundancy is 'genuine' is determined on an objective basis. The fact that an employer and employee have an understanding that a payment on termination is caused by redundancy, or that the employer treats the payment as a redundancy payment for tax purposes, does not of itself establish genuine redundancy. Further requirements

In addition to the basic requirement for a genuine redundancy payment found in subsection 83-175(1), the further conditions for genuine redundancy payment treatment in subsections 83-175(2) and (3) require that: •                 the dismissed employee is not older than the specified age limits; •                 the termination is not at the end of a fixed period of employment; •                 the actual amount paid is not greater than the amount that could reasonably be expected had the parties been dealing at arm's length, in the event that the employer and employee are in fact not dealing at arm's length in relation to the dismissal; •                 there is no arrangement entered into between the employer and employee or the employer and another entity to employ the dismissed employee after the termination; and •                 the payment is not in lieu of superannuation benefits. Application to your circumstances In your case, we considered that: •                 the deed does not provide any indication that your position was superfluous to the employer's needs and the employer does not want the position to be occupied by anyone;

•                 on an objective basis, the claim of injury and the dispute appear to be the prevailing or most influential reason for the termination; the employer and the employee's mutual understanding to treat the payment as a redundancy payment for tax purposes, does not of itself establish genuine redundancy. Conclusion At least two of the four necessary components under paragraph 11 of TR 2009/2 are not satisfied. Therefore, as not all the elements under subsection 83-175(1) are satisfied, the payment is not considered a genuine redundancy payment under section 83-175 of the ITAA 1997. Question 3 Capital Gains Tax (CGT) consideration Compensation paid for the loss of a capital asset or amount is regarded as a capital receipt. However, a capital gain you make from a CGT event is disregarded if it is compensation or damages for any wrong or injury you suffer in your occupation, pursuant to subparagraph 118-37(1)(a)(i) of the ITAA 1997. Section 118-20 of the ITAA 1997 also recognises that a capital gain you make from a CGT event is reduced if, because of the event, a provision of the ITAA 1997 includes an amount in your assessable income for any income year.

Section 118-22 of the ITAA 1997 treats an ETP that you receive as being included in your assessable income. As such, any capital gain you made will be reduced to zero. Application to your circumstances As any capital gain you made will be reduced to zero, under the above anti-overlap provision, it is not necessary to consider the exemption in section 118-37 of the ITAA 1997. Conclusion An exemption under section 118-37 of the ITAA 1997 is not applicable, as any capital gain you make will be reduced to zero. > [1] (2003) 53 ATR 290