Settlement Payment Taxable as ETP

Employment Law: 23 March 2019

In a recent hearing at the Administrative Appeals Tribunal it was held that a payment received by a taxpayer from his former employer as a settlement to legal proceedings was assessable as an employment termination payment (ETP) and not a tax-free capital payment for personal injury.

The taxpayer had claimed age discrimination and breach of contract among other things and the settlement had involved a deed of release with the former employer agreeing to make a settlement payment of $395,000.

In a private ruling the Commissioner of Taxation maintained that the settlement payment was an ETP as it was received 'in consequence of the termination' of the taxpayer's employment. The AAT upheld the Tax Office view and rejected the taxpayer's argument that the payment was a 'capital payment for, or in respect of, personal injury' and therefore excluded from being an ETP. Even if the 'pain, suffering, anxiety, hurt, stress and humiliation' claimed by the taxpayer amounted to 'personal injury', there was no dissection of the settlement payment.

The key appears to be that it was a 'single, undissected lump sum'. The outcome may have been different If the original claim and subsequent settlement documentation had dissected the claim. On the other hand it may be to the employer's benefit as the payment is probably fully tax deductible, whereas the capital payment may not have been.