1 Is the payment made to you pursuant to the Deed of Release an employment termination payment (ETP) under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes. Question 2 Will any capital gains that potentially arise from the receipt of the payment be reduced to nil, under section 118-20 of the ITAA 1997? Answer Yes. This ruling applies for the following period : Financial year ending 30 June 20YY
You were employed with the Employer during the relevant period. You participated in the Share Plan and became entitled to options for the Employer. You were granted options under the Share Plan. Within the relevant employment period your options were vested and became 'outstanding options'. You entered into a Termination Deed with the Employer that included the termination of your employment. The Termination Deed provided that upon your employment being terminated, the Employer agreed to 'buy back' a further % of your vested options for a cash payment, in accordance with the mechanism set out in the rules of the Share Plan. On the specified date your employment with the Employer ended as per the terms of the Termination Deed. Under the terms of Termination Deed, you were required to observe post-employment restraints and restrictions, including: • obligation in relation to a confidentiality agreement • non-compete with the Employer. After the termination of employment, a dispute arose between you and the Employer. Each of the parties engaged legal representation. A deed of release was entered into to settle the dispute (the Deed of Release).
The Deed of Release recitals detail the following in relation to the dispute: Dispute The Parties have defended their positions in relation to the Dispute. Without admission of liability, the Parties have agreed to settle all Claims arising out of or related to the Employment, the Contract, the Termination, the Termination Deed, the Share Plan and the Dispute on the terms set out below. A clause of the Deed of Release states: The Individual releases the Released Parties from all Claims which the Individual has or may at any time hereafter have against any of them arising from or relating in any way to the equity of the Employer, the Employment, the Contract, the Termination, the Termination Deed, the Share Plan, the Forfeiture, or the Dispute, except any Claim relating to the enforcement of this Deed. The individual releases the Released Parties from all Liability related to the Same. The Individual covenants not to continue or commence, or cause to be continued or commenced, any Claims in any way relating to the matters released in clause X.
The Deed of Release provides that you will be paid $X as consideration for providing certain releases to the Employer. This includes a release in relation to the cancellation of all of your options under the Share Plan (which included the 'further X% options' that intended for 'buy back' and the 'balance of the options' that you intended to retain). You received the Payment, in accordance with the Deed of Release.
Income Tax Assessment Act 1997 section 82-130 Income Tax Assessment Act 1997 subsection 995 1(1) Income Tax Assessment Act 1997 section 82-135 Income Tax Assessment Act 1997 paragraph 104-25(1)(b) Income Tax Assessment Act 1997 paragraph 108-5(1)(b) Income Tax Assessment Act 1997 section 118-20 Income Tax Assessment Act 1997 section 118-22
Question 1 Detailed reasoning By virtue of subsection 995-1(1) of ITAA 1997, employment termination payments are defined in subsection 82-130(1) of the ITAA 1997, which 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. To determine if a payment is an employment termination payment (ETP), all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any of the conditions under subsection 82-130(1) will result in the payment not being considered an employment termination payment. Paid as a '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 court's 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: 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 considered the meaning of the phrase 'in consequence of' in the context of the eligible termination payments, TR 2003/13 can still be relied upon 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. Paragraphs 5 and 6 of TR 2003/13 state that:
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. 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.'
The payments in these cases were ETPs because there was a sequence of connected events following the termination which ultimately led to the payment. The payments would not have been made but for the termination. In this case there was a dispute between you and the Employer for all claims and matters relating to the Termination Deed you entered for the termination of your employment. Primarily, as per terms of the Deed, whether your Employer had the right to cancel or to allow the outstanding options to lapse without payment to you; and whether you had breached your post-employment obligations. You and the Employer agreed to settle all claims and differences under the terms of a new Deed of Release. Your settlement payment is to extinguish all claims and all matters relating to: • the equity in the Employer • the employment • the contract • the termination • the Termination Deed • the Share Plan • the forfeiture • the Dispute, except any claim relating to the enforcement of the Deed of Release.
Based on the facts, your employment with the Employer was terminated in accordance with the terms of the Termination Deed. However due to the subsequent dispute between the parties relating to whether the terms of the Deed where properly exercised, a new Deed of Release was executed. The Deed of Release released the Employer from claims you had under the previous Termination Deed, including any payment for options you held under the Share Plan. While the Deed of Release is a direct cause of your settlement payment, the payment would not have been made unless there had been a termination of your employment. That is, there has been a sequence of events leading to the termination which had a relationship and connection, which ultimately led to the settlement payment. The various causes of action to be settled by the Deed of Release are interwoven and intertwined with termination of your employment.
Although the settlement payment (received for the execution of the Deed of Release and for not legally pursuing your former Employer) relates to your claim on the options, the Employer has denied any liability to the allegations and you have released them from all claims relating to the matter. The Deed of Release also does not provide any qualification or clarification that the payment was calculated with regard to the value of the options. Therefore, the payment is not for, or in respect of, the options. It is considered that the settlement payment will be received by you in consequence of the termination of your employment with the Employer as per paragraph 82-130(1)(a) of the ITAA 1997. The payment is received no later than 12 months after termination Your employment was terminated on date C and the Payment was received on date J, which is later than 12 months after the termination. However, 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. Commonwealth determination made by James O'Halloran, Deputy Commissioner of Taxation on 28 March 2018 under reference ETP 2018/1 (which is a legislative instrument, as required by subsection 82-130(7)) states that: Paragraph 82-130(1)(b) of the ITAA 1997 does not apply to a late termination payment if the payment is received more than 12 months after the termination of a person's employment because:
a) legal action was commenced within 12 months of the termination of employment, of which the subject is either or both: (i) the person's entitlement to the payment; (ii) the amount of the person's entitlement; or b) the payment was made by a liquidator, receiver or trustee in bankruptcy of an entity that is otherwise liable to make the payment, where that liquidator, receiver or trustee is appointed no later than 12 months after the termination of employment. ETP 2018/1 - Explanatory statement, at paragraph 8 states: The legal action must have commenced within 12 months of the termination of a person's employment. Legal action is intended to cover any Court, Tribunal and other proceedings of a judicial or quasi-judicial nature which may result in the payment of an amount in consequence of the termination of a person's employment.
In this case there was a legal document in place, being the Termination Deed. A dispute arose between the parties relating to whether the terms of the Termination Deed were properly exercised. Subsequently, through the actions of the parties engaging legal representatives, a new legally enforceable Deed of Release was executed. These actions resulted in the settlement of the dispute and payment of monies to you. A Deed of Release is a legally binding document that parties use to resolve a dispute or bring an agreement to an end. The terms of the Deed are final and there is no recourse for legal action with regard to any claim arising from the dispute, unless one of the parties breaches a term of the deed.
The actions relating to the dispute commenced within 12 months of the termination of your employment. We are of the view that the terms 'other proceedings of a judicial' and/or 'quasi-judicial nature' have a very broad inclusion, which include the actions of executing a formal legal document to resolve a dispute. We therefore believe that the conditions in ETP 2018/1 are satisfied, which means paragraph 82-130(1)(b) of the ITAA 1997 does not apply due to being covered by a determination under subsection 82-130(7). The Commissioner is also of the view that it is reasonable to determine, in writing, that paragraph 82-130(1)(b) of the ITAA 1997 does not apply in accordance with subsection 82-130(5), given that within 12 months of your termination of employment, legal actions were commenced by the parties due to a dispute, that resulted in the execution of a legal document, the Deed of Release. Payment is not a payment mentioned under section 82-135 of the ITAA 1997 Section 82-135 of the ITAA 1997 lists specific payments that are excluded as ETP. Based on the information provided, the Payment does not fall within the definition of an excluded ETP. Conclusion
For the above listed reasons, the Payment meets the definition of ETP under section 82-130 of the ITAA 1997. Question 2 Detailed reasoning CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being released, discharged, or satisfied (paragraph 104-25(1)(b) of the ITAA 1997). A CGT asset is a legal or equitable right that is not property (paragraph 108-5(1)(b)). You acquired a right to receive a payment relating to your employment and Dead of Release. When the Payment was made this right was released, discharged or satisfied; and CGT event C2 happened. Section 118-20 of the ITAA 1997 reduces a capital gain made from a CGT event to the extent that an amount has already been included in your assessable income. Section 118-22 provides that, in applying section 118-20, you must treat an employment termination payment received as being included in assessable income. As such, any capital gain you made will be reduced to zero. > [1] (2003) 53 ATR 290