FBT Q&A – Payment of employee legal fees

Are an employee’s legal fees which are reimbursed pursuant to a negotiated settlement in relation to termination of employment subject to FBT?

Question

An employee is in the process of being terminated from their employment with us. Both parties have agreed to a settlement which involves:

1. An employment termination payment of $X
2. Payment of the employee’s legal fees of $X

The question is whether the payment of the legal fees by us:

1. would constitute assessable income in the hands of the employee; or
2. would give rise to FBT.

Answer

It appears an expense fringe benefit arises, given Council has agreed to pay the employee’s legal fees. However, as this arrangement is part of the employee’s termination settlement process, it raises the issue as to whether the payment will constitute an employment termination payment (‘ETP’).

An ETP is a payment made in consequence of the termination of employment of a person. However, an ETP does not include:

1. accrued annual leave and long service leave payments;
2. salary and wage income;
3. a superannuation benefit;
4. foreign termination payments;
5. certain payments for restraint of trade;
6. certain payments for personal injury.

Based on the above definition, the payment of the legal fees also falls within the definition of an ETP in our view. So what takes precedence – FBT or the ETP provisions?

The definition of ‘fringe benefit’ specifically excludes an amount that is an ETP and so on this basis, our considered view is that the payment of the employee’s legal costs will constitute an ETP.

This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. It is not intended to be, nor should it be relied upon as, a substitute for professional advice. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use.

This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.