Employment termination payment

Is the settlement payment, comprising of various components, received by the taxpayer from their employer an employment termination payment in accordance with section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes This ruling applies for the following period : Year ending 30 June 20YY The scheme commences on: 1 July 20YY

This taxpayer commenced their employment with their employer (the Employer) in the 20YY-YY income year. This taxpayer accepted a secondment with their Employer. The contract providing for the taxpayer's secondment was to run to the end of 20YY. During the 20YY-YY income year, the taxpayer sent three separate emails constituting a formal complaint of bullying and discrimination. During the 20YY-YY income year, the Employer confirmed receipt of the taxpayer's grievances and indicated an intention to undertake an investigation of the issues raised by the taxpayer, in accordance with company policy. During the 20YY-YY income year, the taxpayer was summonsed to a meeting and advised that the Employer decided to terminate their employment. During the 20YY-YY income year, the taxpayer lodged an application with the Fair Work Commission to deal with a general protections dispute involving dismissal under Part 3-1 of the Fair Work Act 2009 . A deed of settlement and release (the Deed) between the taxpayer and the Employer was entered into and executed in the 20YY-YY income year. It provides that:

•                     The taxpayer and the Employer have mutually agreed to the cessation of the taxpayer's employment on the terms set out in the Deed. •                     Upon payment to the taxpayer of all amounts due under the Deed and to the extent permitted by law, the taxpayer releases absolutely and forever discharges the Employer from and against all claims that the taxpayer has now or but for this Deed may have had in the future if the parties had not executed the Deed, except for any claims to enforce the Deed or any of its terms. Under the Deed, the taxpayer's settlement sum comprises of: (a)          compensation for lost wages; (b)          compensation for non-economic losses; (c)           a contribution to your client's legal costs. Payment under the Deed was made in the 20YY-YY income year. The Settlement Sum was made in addition to the following payments already made to the taxpayer by their Employer: (a)          Salary and superannuation contributions which the Employer is required to make up to the Termination Date, including superannuation contributions payable during the period of notice of termination under the Contracts;

(b)          Remuneration for accrued but unused annual leave up to the Termination Date; and (c)           One (1) month remuneration in lieu of notice; less applicable taxes.

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.

Summary The settlement payment, comprising of the various components, made to the taxpayer by their Employer, is an employment termination payment (ETP) in accordance with section 82-130 of the ITAA 1997. Detailed reasoning Employment termination payment A payment is an ETP if it satisfies all the requirements in section 82-130 of ITAA 1997. Subsection 82-130(1) of the ITAA 1997 states that a payment is an ETP 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. To find that a payment is an ETP, all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any of one the three conditions will result in the payment not being considered an ETP. Payment is made 'in consequence of the termination of' your 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. Whilst the courts have divergent views on the meaning of this phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are set out in Taxation Ruling TR 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) . While TR 2003/13 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner. In paragraphs 5 and 6 of TR 2003/13 the Commissioner states: 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. In this case, your taxpayer sent X separate emails constituting a formal complaint of bullying and discrimination to their Employer. The taxpayer was then summonsed to a meeting and advised that the Employer decided to terminate their employment. Subsequently, the taxpayer lodged an application with the Fair Work Commission to deal with a general protections dispute involving dismissal under Part 3-1 of the Fair Work Act 2009 . To resolve the above claim, a settlement payment was made to settle the dispute between the taxpayer and the Employer. It can be said that the settlement payment follows as an effect or result of the termination of the taxpayer's employment with their Employer. That is, there was a sequence of connected events following the termination which ultimately led to the payment.

Therefore, the settlement payment, inclusive of the various components was received in consequence of the termination of the taxpayer's employment. Payment is received no later than 12 months after that termination In this case, the settlement payment was received no more than 12 months after the termination of the taxpayer's employment with the Employer. Payments mentioned in section 82-135 of the ITAA 1997 Section 82-135 of the ITAA 1997 lists certain payments that are not ETPs. Neither of the payments listed in the settlement sum is a payment mentioned in subsection 82-135 of the ITAA 1997. Conclusion The total settlement payment, comprising of the various components, received by the taxpayer in the 20YY-YY income year, is an ETP in accordance with section 82-130 of the ITAA 1997. Section 82-145 of the ITAA 1997 defines taxable component of an ETP.