1 Is the payment of $XX,XXX for general damages, as outlined in the Terms of Settlement, an employment termination payment (ETP) as per section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?
1 Yes, the payment for general damages is an ETP under section 82-130 of the ITAA 1997. This ruling applies for the following period: 1 July 20XX to 30 June 20XX The scheme commenced on: 1 July 20XX
The Taxpayer was employed by the Employer from XX XXX 20XX. The Taxpayer made an application to the FairWork Commission for a remedy, alleging that the Employer had taken adverse action against them. Following this application, the parties came to an agreement, as set out in the Terms of Settlement (the Terms), signed by the Taxpayer (as the Taxpayer) on XX XXX 20XX, and the Employer (as the Employer) on XX XXX 20XX. Relevantly, the Terms contain the following clauses: • The Employer denies the allegation. • The Taxpayer and the Employer agree to fully and finally settle the matter on the following bases: Payment The Employer will pay to the Taxpayer the amount of $X gross, to be treated as general damages, in addition to any other monies previously paid to the Taxpayer by the Employer or to which they are entitled to receive payment for on termination of employment, including any accrued annual leave. The dollar amount specified in these terms of settlement will be paid by the Employer within X days of the Taxpayer and the Employer signing these terms of settlement. Termination of employment
The Taxpayer will be deemed to have resigned their employment with the Employer on XX XXX 20XX. By signing the Terms, the Taxpayer released the Employer from all claims, suits, demands, actions or proceedings arising out of, or connected with, the Taxpayer's employment with the Employer (including but not limited to the cessation of the employment). In applying to the ATO for a private binding ruling on the correct tax treatment of the above payment, the Taxpayer provided documentation, including the following: • A statutory declaration dated XX XXX 20XX, signed by XXXXXX, which states that they attended the conciliation conference between the Taxpayer and the Employer, in the role of a support person for the Taxpayer. The statutory declaration states that the Taxpayer was verbally assured on multiple occasions that the payment would be tax-free, and that this was a significant factor in the Taxpayer's acceptance of the Terms. • A Notice of Clarification issued to the Taxpayer by the FairWork Commission, dated XX XXX 20XX, stating that:
the payment was intentionally described as general damages, and was not intended to represent wages, salary, leave, superannuation or any other employment-related entitlement the classification of the payment as general damages was made to reflect compensation of a general nature, separate and distinct from any statutory or contractual entitlements payable upon termination of employment The Commission does not provide taxation advice and does not determine the tax treatment of settlement payments. However, the wording of Clause X was deliberately framed 'so that the amount could be understood as a compensatory sum, rather than as consideration for services or income in respect of employment'. • A payslip for the period XX XXX 20XX to XX XXX 20XX, referencing payments made on XX XXX 20XX, including the payment of $XX,XXX, referred to as 'Ex-Gratia Payment', with an amount of tax of $X,XXX ('ETP Tax') withheld. • A Statement of Service confirming the Taxpayer was employed from XX XXX 20XX to XX XXX 20XX, when the Taxpayer resigned from the role.
Income Tax Assessment Act 1997 subsection 82-130(1) Income Tax Assessment Act 1997 Section 82-135 Income Tax Assessment Act 1997 subsection 995-1(1)
By virtue of subsection 995-1(1) of the ITAA 1997, employment termination payments (ETPs) 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. For a payment to be an ETP, all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Payment received 'in consequence of' the termination of employment The phrase 'in consequence of' is not defined within the ITAA 1997. However, the words have been interpreted by the courts in several cases. We have issued 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)which provides the Commissioner's view on the meaning of the phrase 'in consequence of' as used in Subdivision 82-C of the ITAA 1997. The Full High Court of Australia considered the expression 'in consequence of the termination of any employment' in Reseck v Commissioner of Taxation (Cth) [1975] HCA 38 (Reseck). The relevant issue in that case was whether amounts paid to a taxpayer by his employer at the end of two periods of employment, to which the taxpayer was entitled under an agreement between the employer and the taxpayer's union, were an allowance paid in a lump sum 'in consequence of retirement from, or the termination of, any office or employment ...'. Justice Gibbs concluded that the amounts were made in consequence of the termination of the taxpayer's employment. His Honour said that:
Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination ... It is not in my opinion necessary that the termination of the services should be the dominant cause of the payment ... In the present case the allowance was paid in consequence of a number of circumstances, including the fact that the taxpayer's service had been satisfactory and that the industrial agreements provided for the payment, but it was none the less paid in consequence of the termination of the taxpayer's employment. Justice Jacobs also concluded that the amounts constituted an allowance that was paid in consequence of the termination of the taxpayer's employment. His Honour said: It was submitted that the words "in consequence of" import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a "following on". The different interpretations of 'in consequence of' adopted by Justices Gibbs and Jacobs were considered by the Full Federal Court in
McIntosh, Charles v The Commissioner of Taxation [1979] FCA 65. The matter before the court concerned a taxpayer who one week after retirement, commuted part of the pension to which he became entitled upon his retirement, into a lump sum. The commuted payment was made out of a provident fund established by a bank for the payment of benefits to bank officers on their retirement. The issue being considered by the court was whether the commuted lump sum payment came within former paragraph 26(d) of the Income Tax Assessment Act 1936 . Justice Brennan considered the judgments of Justices Gibbs and Jacobs in Reseck and concluded that their Honours were both saying that a causal nexus between the termination and payment was required, though it was not necessary for the termination to be the dominant cause of the payment. Justice Brennan said that:
Though Jacobs J. speaks in different terms, his meaning may not be significantly different from the meaning of Gibbs J ... His Honour denies the necessity to show that retirement is the dominant cause, but he does not allow a temporal sequence alone to suffice as the nexus. Though the language of causation often contains the seeds of confusion, I apprehend his Honour to hold the required nexus to be (at least) that the payment would not have been made but for the retirement. (emphasis added) In the same case, Justice Lockhart stated: In my opinion, although the phrase is sufficiently wide to include a payment caused by the retirement of the taxpayer, it is not confined to such a payment. The phrase requires that there be a connection between the payment and the retirement of the taxpayer, the act of retirement being either a cause or an antecedent of the payment. The phrase used in [section 26(d)] is not "caused by" but "in consequence of". It has a wider connotation than causation and assumes a connection between the circumstance of retirement and the act of payment such that the payment can be said to be a "following on" of the retirement.
TR 2003/13 considers the divergent views as to the correct interpretation of the phrase 'in consequence of' as interpreted by the courts, and provides our view as to its interpretation. This is explained in paragraphs 5 to 7 of TR 2003/13, as follows: 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. 7. The greater the length of time between the termination of employment and the payment, the more likely that the causal connection between the termination and the payment will be too remote for a conclusion that a payment was received in consequence of the termination of employment.
As per the Terms, the Taxpayer's employment was terminated on XX XXX 20XX and the general damages payment was agreed to be paid within X days of the settlement being signed by both parties, this signing being completed on XX XXX 20XX. The provided Statement of Service confirms the employment ended on XX XXX 20XX, when the Taxpayer resigned from their employment. Regardless of the classification of the payment as 'general damages', (in the words of the Commission 'to reflect compensation of a general nature, separate and distinct from any statutory or contractual entitlements payable upon termination of employment'), the payment was nonetheless directly tied to the ending of the Taxpayer's employment. The test does not refer to the categorisation of the payment by the parties, or to whether it is a contractual entitlement, or a payment in the nature of wages or salary, but merely to whether it was paid 'in consequence of' the termination of the employment. As can be seen from the above, termination is not required to be the dominant cause of the payment. The payment formed part of the Terms, and was tied to the termination of the Taxpayer's employment, by resignation.
It is clear that, but for the employment being terminated, the payment would not have been paid. The payment was received by the Taxpayer in consequence of the termination of their employment. This requirement has been satisfied. Payment received no later than 12 months after termination As per the provided Statement of Service, the Taxpayer's employment ended on XX XXX 20XX, by resignation. The provided payslip confirms that the payment was made to the Taxpayer on XX XXX 20XX, within X days of the signing of the Terms (completed on XX XXX 20XX), as was required. The payment was received within XX months of termination and therefore this requirement has been satisfied. Payment is not a payment mentioned under section 82-135 of the ITAA 1997 To be an ETP under subsection 82-130(1) of the ITAA 1997, the payment must not be a payment mentioned within section 82-135 of the ITAA 1997. Such payments are specifically excluded from being an ETP and include, for example, lump sum payments for unused annual or long service leave, and the tax-free part of a genuine redundancy payment, or an early retirement scheme payment.
The payment the Taxpayer received is not a payment referenced in section 82-135 of the ITAA 1997, and so is not excluded from being an ETP. Conclusion The payment meets all the conditions of an ETP under subsection 82-130(1) of the ITAA 1997. The payment has been correctly classified, and taxed, as an ETP.