The AAT has held that the Commissioner had incorrectly calculated the tax payable on the taxable component of an employment termination payment (ETP).
The Tax Office calculated the tax payable on the ETP taxable component of $250,880 by first offsetting the taxpayer’s deductions (and $173,445 of prior year losses) against his “ordinary taxable income”. The taxpayer argued that the deductions and losses should have first been applied against the “employment termination remainder” (subject to a 45% tax rate), with the excess then offset against the ETP cap amount ($150,000 for 2009-10). On this basis, the taxpayer said the total tax liability would be $8,512 (instead of the $31,881 assessed).
The AAT agreed with the taxpayer and held that the Commissioner had incorrectly calculated the tax payable on the ETP by not allocating the deductions and prior year losses in a manner most favourable to the taxpayer. The AAT considered that the Commissioner’s approach of offsetting all the deductions first against the ETP cap amount (capped at a 15% rate), and thereby leaving most of the employment termination remainder subject to tax at 45%, “leads to a perverse outcome which does not seem to be supported by the legislation.” In setting aside the amended assessment, the AAT remitted the matter to the Tax Office to recalculate the tax payable by first offsetting the deductions against the employment termination remainder with the balance of the deductions to be offset against the ETP cap amount.
(AAT Case [2012] AATA 660, Re Boyn and FCT, AAT, Ref No: 2012/2169, Deutsch DP, 28 September 2012.)
[LTN 191, 3/10]