It is a fact of life that not all employment arrangements end amicably and sometimes this results in the employer making a payment in settlement against alleged actions of the employer (e.g. wrongful dismissal etc.). Where such a payment is made, a question arises as to the nature of that payment. Is it an Employment Termination Payment (ETP), a Genuine Redundancy Payment or something else? Whilst, this issue may seem to be of concern solely to the employee correctly identifying the nature of the payment will affect the employer’s withholding obligations.
A recent Tribunal decision, Stark and FCT [2021] AATA 2583 (Stark’s Case), has shed further light on the issue in relation to on an out of court settlement arising from the dismissal of an employee in settlement of their claims of wrongful dismissal and deceptive conduct
Stark’s Case – Overview
The Taxpayer, a chartered accountant, commenced a new role with the Employer in late 2000. The experience was ‘not a happy one’, which resulted in the Employer terminating the Taxpayer’s employment in December 2001. The Taxpayer instigated legal proceedings against the Employer for deceptive conduct and wrongful dismissal. The Supreme Court proceedings were part heard when they were settled by the Taxpayer accepting a sum of money. The Taxpayer executed the Settlement Deed in March 2009. The Taxpayer treated the Payment as an ETP in his 2009 income tax return and the Commissioner assessed it on this basis. The Taxpayer subsequently objected to the assessment with the Commissioner disallowing the objection on the basis that the Payment was ordinary income. The Taxpayer then applied to the Tribunal for review of the objection decision asserting that the payment was not an ETP on the basis that it was either a capital payment for personal injury (which would preclude it from being an ETP and would also be exempt from CGT) or a Genuine Redundancy Payment. Relevant clauses of the deed of release include:- Clause 2.1 provided that in consideration of the payment, the Taxpayer released the Employer from ‘all claims arising out of or in any way connected with the Employment, its Termination, the Complaints and the Proceedings or any one or more of them’
- Clause 2.2 provided that the settlement amount included $505,500 in respect of the claim by the Taxpayer for lost earnings (less any amount required to be withheld by the Employer on account of taxation).
What is an Employee Termination Payment?
The key issue in Stark’s Case revolved around what constitutes an ETP. Broadly, a payment will be an ETP if:- It is received by a taxpayer:
- In consequence of the termination of their employment; or
- After another person’s death, in consequence of the termination of the other person’s employment; and
- It is received no later than 12 months after that termination (subject to certain exceptions); and
- It is not an excluded payment.
- The part of a Genuine Redundancy Payment or Early Retirement Scheme Payment that is non-taxable as calculated in accordance with the statutory provisions; and
- A capital payment for, or in respect of, personal injury to the extent the payment is reasonable having regard to the nature of the personal injury and its likely effect on your capacity to derive income from personal exertion.