To be an ETP or not to be an ETP?

Stark and the Commissioner of Taxation (Taxation) [2021] AATA.

?On reading the case of Stark and the Commissioner of Taxation, one cannot help but feel a tinge of sadness for the taxpayer. Here was a 76 year old man, representing himself in the Administrative Appeals Tribunal, arguing against a tax impost that resulted from difficult events that occurred to him nearly 20 years earlier. Although self-represented, Mr Stark made a reasonable fist of his arguments before Senior Member R J Olding of the AAT. Nevertheless, Mr Olding did refer to the taxpayers "comprehensive submissions" as a "mixed blessing".?

The taxpayer was terminated from his employment on 19 December 2001. Following this, the taxpayer sued his former employer, and the matter was finally settled with him receiving a payout that included $505,500. The ATO assessed the amount as ordinary income, to which the taxpayer objected.?

Despite the fact that the ATO had assess the amount as ordinary income, before the AAT, the ATO argued that the amount was an employment termination payment (ETP).?

The taxpayer had several arguments. One was that the amount was a capital payment disregarded as a capital gain under s. 118-37 ITAA 1997 and also excluded from the definition of an ETP under s. 82-135(i) ITAA 1997. This latter provision excludes from the definition of an ETP "a capital payment for or in respect of personal injury… and its likely effect on your capacity to derive income from personal exertion".?

However, the AAT was not persuaded by this point. Senior Member Olding decided that he was bound by the decision in Le Grand v Commissioner of Taxation (2002) 124 FCR 53. The AAT thought that case had "close parallels" with the taxpayer’s circumstances.?

The AAT said, referring to the judgement in Le Grand "… where claims for damages for termination of employment and deceptive conduct are interwoven, the settlement of the latter does not break the causal relationship between termination of the employment and the payment of the settlement amount. It does not detract from the characterisation of the payment as an effect of or following on from, and thus in consequence of, termination of employment".?

This case stands for the idea that where there is a "whiff" of the payment being in respect of the termination of employment, it will probably be treated as an ETP.?

John Jeffreys, 2 August 2021