1 Is the ex-gratia payment made to you under the Deed of Settlement and Release an employment termination payment as per section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes Question 2 Is any part of the employment termination payment excluded from the whole-of-income cap under paragraph 82-10(6)(d) of the ITAA 1997? Answer No This private ruling applies for the following period: For the year ended 30 June 2025
You were employed by Employer up until the 2025 income year. You advised that during your employment, you raised formal complaints alleging adverse treatment, breaches of your contractual and statutory employment rights, and unlawful exclusion from the worksite. You and the Employer entered into protracted "without prejudice" negotiations, which culminated in the execution of a formal Deed of Settlement and Release (the Deed). Your settlement payment was conditional upon ceasing your employment and releasing and discharging the Employer from any claim or liability in relation to those matters. Both parties have given no admission of liability, as stated in the Deed. Your payment summary from the Employer shows that you received an employment termination payment (ETP) during the 2025 income year.
Income Tax Assessment Act 1997 section 82-130 Income Tax Assessment Act 1997 section 82-135 Income Tax Assessment Act 1997 section 82-10 We followed the ATO document 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'
Question 1 Is the ex-gratia payment made to you under the Deed of Settlement and Release an ETP as per section 82-130 of the ITAA 1997? Summary The ex-gratia settlement payment made to you in accordance with the Deed is an ETP. Detailed reasoning A payment is an ETP if it satisfies all the requirements in section 82-130 of the ITAA 1997 and is not specifically excluded under section 82-135 of the 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. Paid as '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 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 ) . 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.'
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 alleging adverse treatment, breaches of your contractual and statutory employment rights, and unlawful exclusion from the worksite. You and the Employer agreed to settle the claims under the terms of the Deed. Your settlement payment is conditional upon ceasing your employment and releasing and discharging the Employer from any claim or liability in relation to those matters. Both parties have given no admission of liability, as stated in the Deed. There was a sequence of events following the termination which ultimately led to the payment being made under the Deed. The termination 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 was received by you in consequence of the termination of your employment. As such, the requirement of subparagraph 82-130(1)(a)(i) of ITAA 1997 has been 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. Your employment with the Employer ended during the 2025 income year, and the payment was received during the 2025 income year. This requirement is considered satisfied. 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. Your settlement payment is not a payment mentioned in subsection 82-135 of the ITAA 1997. Conclusion The payment received by you from the Employer is an ETP in accordance with section 82-130 of the ITAA 1997. Question 2 Is any part of the ETP excluded from the whole-of-income cap under paragraph 82-10(6)(d) of the ITAA 1997? Summary As the payment does not meet all the conditions of subsection 82-10(6) of the ITAA 1997, it cannot be excluded from the whole-of-income cap calculation. Detailed reasoning
An ETP is concessionally taxed up to a capped limit. In accordance with subsection 82-10(3) of the ITAA 1997, you are entitled to a tax offset that ensures the rate of tax on the taxable component 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%. Any part of an ETP you receive that exceeds the cap is taxed at the top marginal rate. There are two caps, the ETP cap and the whole-of-income cap. The ETP cap is $245,000 (indexed) for the 2024-25 income year reduced by any earlier ETPs paid in the same income year. The whole-of-income cap is $180,000 minus other taxable income you earn throughout the income year. Which cap applies depends on the type of payment. Subsection 82-10(4) of the ITAA 1997 states that the ETP cap will apply to an 'excluded payment'. For all other 'non-excluded' ETPs you will apply the lesser of the ETP cap and the whole-of-income cap. Under paragraph 82-10(6)(d) of the ITAA 1997 an excluded payment includes a payment that: • is in connection with a genuine dispute; and
• is principally compensation for personal injury, unfair dismissal, harassment, discrimination or a matter described by the regulations; and • exceeds the amount that could, at the time of the termination of your employment reasonably be expected to be received by you in the consequence of the voluntary termination of your employment. For the payment to be treated as an excluded payment, it needs to meet all three requirements prescribed above. In this case, there was a dispute between you and the Employer alleging adverse treatment, breaches of your contractual and statutory employment rights, and unlawful exclusion from the worksite. You entered into a Deed to settle the claims in exchange for a compensatory payment. The Deed provides that in return for the payment, you release the Employer from any claims you may have arising out of your employment or the cessation of that employment. Furthermore: • The Deed contains the entire understanding between the Parties concerning the subject matter of the Deed and supersedes all prior communications between the Parties. • The Deed states that both parties reached an agreement 'without admission to liability'.
• There is no mention in the Deed as to the reasons why the Employer wanted to terminate your employment. • There is no mention in the Deed as to your dispute with the Employer. • By executing the Deed, you agreed to terminate your employment in exchange for receiving the payment. • The Deed clearly states that the payment will be an ETP. The Deed does not support the requirement that the payment was primarily compensation for personal injury, unfair dismissal, harassment, discrimination or a matter prescribed by the regulations. As the payment does not meet all the conditions of paragraph 82-10(6)(d) of the ITAA 1997, it cannot be excluded from the whole-of-income cap calculation. Therefore, the whole-of-income cap applies to the ETP. > [1] (2003) 53 ATR 290