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Ruling

Subject : Employment termination payment

Questions

1. Is any portion of the termination payment considered to be a capital payment for, or in respect of personal injury and therefore excluded from being an employment termination payment in accordance with subsection 82-135(i) of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is any portion of the termination payment exempt from tax, as an invalidity segment of an employment termination payment, in accordance with section 82-150 of the ITAA 1997?

Advice/Answers

1. No.

2. Yes.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

In the 2006-07 income year, your client commenced employment with an employer (the employer).

During the course of your client's employment, your client suffered an injury and went on sick leave.

In the 2010-11 income year, after your client had various discussions with the employer regarding your client's illness, an offer was made to your client.

In a letter (the Deed), it was agreed between your client and the employer to resolve all issues arising out of or in connection with your client's employment or the termination of that employment. The employer agreed to make a termination payment to your client within a specified number of days after your client resigned from employment, effective from the fourth quarter of the 2010-11 income year.

Your client acknowledged in the Deed that part of the Termination Payment constitutes damages in respect of an injury within the meaning of section 151A of the Workers Compensation Act 1987 (NSW). Your client also acknowledged that the injuries were settled with an express denial of liability by the employer and that the Deed must not be interpreted as an admission by the employer of liability to your client in respect of the injuries.

In the fourth quarter of the 2010-11 income year, your client terminated employment and the employer made a payment to your client to settle all claims and all other employment related issues in the terms contained in the Deed.

The severance package includes a severance payment, an ex-gratia payment and a payment in lieu of outplacement services.

An amount was calculated as a tax free component with the remaining amount shown as an employment termination payment and taxed at 31.5%.

The PAYG Payment Summary - employment termination payment for the year ending 30 June 2011 shows a taxable component with an amount of tax withheld was made to your client in the fourth quarter of the 2010-11 income year.

The PAYG Payment Summary - individual non-business for the year ending 30 June 2011 shows an amount at Lump sum D.

In a letter dated in late 2011, a medical practitioner has stated that your client has suffered an illness from early 2010. Furthermore, your client has a continuing medical condition that will mean that they are unable to be employed in a capacity that they were qualified for again.

In a letter dated in late 2011, another medical practitioner has stated that your client suffers from an illness which began in early 2009 and in the medical practitioner's opinion, your client's illness will render your client unable to ever be gainfully employed in the capacity for which your client was trained for.

Your client is under preservation age.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 27A(1)

Income Tax Assessment Act 1936 Section 27G

Income Tax Assessment Act 1997 Subsection 82-10(3)

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Subsection 82-130(1)

Income Tax Assessment Act 1997 Paragraph 82-130(1)(a)

Income Tax Assessment Act 1997 Paragraph 82-130(1)(b)

Income Tax Assessment Act 1997 Paragraph 82-130(1)(c)

Income Tax Assessment Act 1997 Subsection 82-130(2)

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Subsection 82-135(i)

Income Tax Assessment Act 1997 Section 82-140

Income Tax Assessment Act 1997 Subsection 82-150(1)

Income Tax Assessment Act 1997 Paragraph 82-150(1)(a)

Income Tax Assessment Act 1997 Subparagraph 82-150(1)(a)(i)

Income Tax Assessment Act 1997 Paragraph 82-150(1)(b)

Income Tax Assessment Act 1997 Paragraph 82-150(1)(c)

Income Tax Assessment Act 1997 Paragraph 82-150(1)(d)

Income Tax Assessment Act 1997 Subsection 82-150(2)

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary

The amount calculated under the formula as the invalidity segment of an employment termination payment is exempt from tax. The remaining amount is the taxable component of an employment termination payment and is included in your client's income tax return for the 2010-11 income year.

As your client has not yet reached preservation age, and the taxable component is under the employment termination payment cap of $160,000, a tax offset will apply to ensure that the taxable component is taxed at no more than 30% plus Medicare levy (if any).

Detailed reasoning

Invalidity segment

Where a person's employment is terminated because of ill-health and the person receives an employment termination payment, part of the payment may be tax free. This component is called an invalidity segment.

Therefore, prior to determining if the payment includes an invalidity segment, the payment must be an employment termination payment.

Employment termination payment

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

employment termination payment has the meaning given by section 82-130 of the ITAA 1997.

Subsection 82-130(1) of the ITAA 1997 states that:

A payment is an employment termination payment if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

(ii) after another person's death, in consequence of the termination of the other person's employment; and

(b) it is received no later than 12 months after that termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

Subsection 82-130(2) of the ITAA 1997 states:

A life benefit termination payment is an employment termination payment to which subparagraph (1)(a)(i) applies.

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

· payment for unused annual leave or unused long service leave;

· the tax-free part of a genuine redundancy payment or an early retirement scheme payment.

· reasonable capital payments for personal injury.

To determine if the severance payment constitutes an employment termination payment, all the conditions in section 82-130 of the ITAA 1997 will need to be satisfied.

Failure to satisfy any of the three conditions will result in the payment not being considered an employment termination payment. Furthermore, any termination payments received outside of the 12 months will be taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12 month rule.

Essentially, section 82-130 of the ITAA 1997 states that for a payment to be a life benefit termination payment, it must be made to the taxpayer in consequence of the termination of their employment.

Payment received in consequence of the termination of employment

The first condition to be met is that there must be an employment termination payment that is made in consequence of the termination of employment of the taxpayer.

It should be noted that the phrase 'in consequence of the termination of your employment' is not defined in the legislation. However, both the Courts and the Commissioner have considered the meaning of the words 'in consequence of' in relation to 'eligible termination payments' (ETPs), the predecessor of employment termination payments.

In Taxation Ruling TR 2003/13 the Commissioner has considered the meaning of the phrase 'in consequence of'.

In paragraph 5 of TR 2003/13 the Commissioner states:

… a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be:

… a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

The phrase 'in consequence of termination of employment' has been interpreted by the courts in several cases.

Of note are the decisions made by the High Court in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325 (McIntosh).

In Reseck Justice Gibbs stated:

Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination… It is not my opinion necessary that the termination of the services should be the dominant cause of the payment.

While Justice Jacobs stated:

It was submitted that the words 'in consequence of' import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a 'following on'.

In looking at the phrase 'in consequence of' the Full Federal Court in McIntosh considered the decision in Reseck.

Justice Brennan considered the judgments of Justice Gibbs and Justice Jacobs in Reseck and concluded that their Honours were both saying that a causal nexus between the termination and payment was required, though it was not necessary for the termination to be the dominant cause of the payment.

Suffice it to say that both Courts' views were that for a payment to be made in consequence of the termination of employment it had to follow on as a result or effect of the termination of employment. Additionally, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient.

Furthermore, in Le Grand v Federal Commissioner of Taxation [2002] FCA 1258; (2002) 124 FCR 53; (2002) 195 ALR 194; (2002) 2002 ATC 4907; (2002) 51 ATR 39 (Le Grand), the issue before the court was whether an amount received by the applicant as a result of accepting an offer of compromise in respect of claims brought by him against his former employer, in relation to the termination of his employment was in whole, or in part, an ETP. It was held that a settlement payment for litigation in relation to a taxpayer's dismissal was an ETP.

Justice Goldberg stated:

I am satisfied that there is a sufficient connection between the termination of the applicant's employment and the payment to warrant the finding that the payment was made "in consequence of the termination" of the applicant's employment. I am satisfied that the payment was an effect or result of that termination in the sense that there was a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment.

Justice Goldberg concluded that the test for determining when a payment is made in consequence of the termination of employment is that which was articulated by Justice Gibbs in Reseck. Thus, for the payment to have been made in consequence of the termination of employment, the payment must follow as an effect or result of the termination of employment. As earlier stated in paragraph 6 of TR 2003/13, there must be 'a causal connection between the termination and the payment even though the termination need not be the sole or dominant cause of the payment'.

The Full Federal Court in Dibb v Federal Commissioner of Taxation [2004] FCAFC 126; (2004) 207 ALR 151; (2004) 2004 ATC 4555; (2004) 55 ATR 786, has applied the above decisions in finding that the payment received by the taxpayer under a Deed of Release to settle various causes of action against the employer following the termination of employment was an ETP.

Paragraph 31 of TR 2003/13 the Commissioner states:

It is clear from the decision in Le Grand, that when a payment is made to settle a claim brought by a taxpayer for wrongful dismissal or claims of a similar nature that arise as a result of an employer terminating the employment of the taxpayer, the payment will have a sufficient causal connection with the termination of the taxpayer's employment. The payment will be taken to have been made in consequence of the termination of employment because it would not have been made but for the termination.

The essence of this analysis is that if the payment follows as an effect or a result from the termination of employment, the payment will be made in consequence of the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. Hence the payment will be an employment termination payment unless the payment is specifically excluded under section 82-135.

The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In the facts of this case, your client was employed with an employer (the employer).

During the course of your client's employment, your client suffered an injury and went on sick leave.

Discussions were held between your client and the employer regarding your client's illness, with an offer being made by the employer to your client.

In a letter (the Deed), it was agreed between your client and the employer to resolve all issues arising out of or in connection with your client's employment or the termination of that employment. The employer would make a termination payment to your client and that your client would resign from employment with the employer effective from the fourth quarter of the 2010-11 income year.

It is clear from the facts provided that the termination payment made to your client is made as 'in consequence of the termination of employment'. Although the dominant cause of the payment was to settle any claims brought by your client against your client's former employer, there is still a causal connection between the termination and the payment. The claims, the termination and the payment are all intertwined and connected. Therefore the first requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

The payment is received no later than 12 months after termination

The second condition for the payment to meet the criteria, as an employment termination payment is stated under paragraph 82-130(1)(b) of the ITAA 1997. The payment must be received within 12 months of the termination of employment, unless covered by a determination exempting your client from the 12 month rule.

In the facts of this case, your client resigned from employment. Your client mutually agreed with the employer to settle all claims and resign from employment effective from the fourth quarter of the 2010-11 income year and receive the payment. As the payment was made to your client within the 12 months of your client's termination of employment the requirements of paragraph 82-130(1)(b) of the ITAA 1997 has been met.

The final requirement under paragraph 82-130(1)(c) of the ITAA 1997 is that the payment is not a payment mentioned in section 82-135.

Exclusions under section 82-135 of the ITAA 1997

Certain payments made on termination of employment are excluded from being an employment termination payment under section 82-135 of the ITAA 1997. These payments include any accrued annual and long service leave and the tax-free parts of a genuine redundancy payment or an early retirement scheme payment as well as other types of payments which do not apply to an employment termination payment.

In this case, consideration must be given as to whether the personal injury suffered by your client is covered by the specific exemption for personal injury in paragraph 82-135(i) of the ITAA 1997 (payments that are not employment termination payments). This paragraph states that employment termination payments do not include:

a capital payment for, or in respect of, personal injury to you so far as 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 (within the meaning of the definition of income derived from personal exertion in subsection 6(1) of the Income Tax Assessment Act 1936);…

This exclusion is for a payment or benefit that compensates or reimburses the taxpayer for or in respect of the particular injury.

In Commissioner of Taxation (Cth) v. Scully (2000) 201 CLR 148; [2000] HCA 6; (2000) 2000 ATC 4111; (2000) 43 ATR 718 (Scully) the High Court, in considering former paragraph (n) of the definition of an eligible termination payment (ETP) in former subsection 27A(1) of the ITAA 1936 (former paragraph (n)),held that compensation must be calculated by reference to the nature and extent of the injury or likely loss to the taxpayer.

In considering the meaning of personal injury for the purposes of the former paragraph (n) exclusion, the Administrative Appeals Tribunal (AAT) has cited the decision by the Victorian Supreme Court in Graham v Robinson [1992] 1 VR 279 (Graham v. Robinson), in AAT Case 11,722 (1997) 35 ATR 1114; (1997) 97 ATC 258, McMahon v Commissioner of Taxation (Cth) [1999] AATA 5; (1999) 41 ATR 1056; (1999) 99 ATC 2025 (McMahon) and, more recently, in Re Applicant and Federal Commissioner of Taxation [2005] AATA 583; (2005) 2005 ATC 162; [2006] ALMD 8399; (2005) 59 ATR 1161, and held that personal injury does not extend beyond physical injury or mental illness.

The Victorian Supreme Court had to decide if emotional hurt (that is, hurt, distress, public scandal, hatred, odium, ridicule and contempt) was a personal injury in its decision in Graham v. Robinson, where Justice Smith stated at 281:

In the absence of express authority, I have come to the conclusion that the expression personal injury does not extend beyond physical injury and mental illness to include emotional hurt. I am encouraged to this view by the fact that the law has rejected grief or sorrow as a form of injury which can be relied on to mount a claim in negligence: Mount Isa Mines Ltd. v. Pusey  (1970) 125 CLR 383, at p. 394 and Jaensch v. Coffey  (1984) 155 CLR 549, at p. 587. It is true that damages are awarded for pain and suffering in the typical personal injury case.  They are awarded, however, where pain and suffering flow from and are connected with physical or mental injury and may therefore be said to be damages in respect of personal injury.

Flowing from these decisions, it can be said that there are three types of injury a person can receive:

(a) behavioural injury - one that involves physical injury (internal and/or external) and/or mental injury that is clearly discernible to a qualified medical practitioner;

(b) non-behavioural injury - hurt, distress, anxiety, et cetera., that flows from the death of, or serious injury to, a relative or close friend; wrongful dismissal; defamation; et cetera. This type of injury may have legal remedies under the law of torts (for example, defamation, slander), statute (for example, sexual harassment, discrimination), or contract (for example, employment, professional negligence); and

(c) property injury - damage to a person's property.

Notwithstanding it may be said all three types of injury may be personal, it is considered only the first type (that is, behavioural injury) falls within the meaning of the term personal injury as used in the paragraph (n) exclusion.

The decision in Graham v. Robinson was applied in McMahon in relation to a payment for alleged damage to a taxpayer's reputation. In McMahon, a critical performance appraisal of McMahon and other comments were published in the media. Subsequent to this, McMahon's employment was terminated and it was agreed to pay him certain amounts including an amount for the alleged damage to his reputation. Senior Member Block stated:

26 The tribunal also notes the stipulation in the concluding portion of s27A(1)(n) of the ITAA 1936 that the amount of consideration for personal injury is to be regarded as an ETP only to the extent that it is reasonable having regard to the nature of the injury and the taxpayers capacity to derive income from personal exertion. The tribunal considers that the inclusion by the legislature of the words from personal exertion tends to confirm that the section is intended to exclude from the definition of ETP payments in respect of injuries to the person, where such injuries being physical injuries or mental illnesses which have an assessable and identifiable impact on the capacity of the taxpayer to earn income. The tribunal considers in summary that an injury to person is distinguishable from an injury to a persons reputation.

27 For the Reasons set out previously (and bearing in mind that the decision in Graham v.  Robinson is binding on the tribunal), the reputation payment was not made in respect of personal injury within s27A(1)(n) of the ITAA 1936; accordingly the reputation payment was correctly assessable as an ETP.

To reiterate, for an amount to be excluded from the definition of an ETP by virtue of former paragraph (n), there must be a behavioural type personal injury.

From 1 July 2007, former paragraph (n) has been replaced by paragraph 82-135(i) of the ITAA 1997. However, the Explanatory Memorandum (EM) to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 stated, in relation to section 82-135 of the ITAA 1997, that:

consistent with current legislation, certain payments are prevented from qualifying as employment termination payments.

It is therefore appropriate to cite cases that refer to the previous legislation.

The payment in Scully was held not to be in respect of personal injury. Acting Chief Justice Gaudron and Justices McHugh, Gummow and Callinan stated in their joint decision:

In our opinion, the payment in this case cannot be characterised as consideration... in respect of, personal injury. The fact that the payment is not calculated by reference to the nature and extent of the injury or likely loss to the respondent and the fact that the other benefits are similar to that for total and permanent disablement point inevitably to the conclusion that the payment was consideration... for, or in respect of the respondent's termination of employment and her rights under the Trust Deed and was not consideration... for, or in respect of her injury.

From the foregoing it is apparent that for an amount to meet the definition of consideration in paragraph 82-135(i) of the definition of employment termination payment, the payment must be for personal injury and be calculated by reference to the nature and extent of the injury or likely loss to the taxpayer.

In this case, your client acknowledged in the Deed that part of the termination payment constitutes damages in respect of an injury however, your client also acknowledged that the injuries were settled with an express denial of liability by the employer and that the Deed must not be interpreted as an admission by the employer of liability to your client in respect of the injuries.

The termination payment is a single undissected lump sum payment which bears no relation to a capital payment for, or in respect of, personal injury to your client.

The severance amount was made by the employer for your client to resign from employment and was not made in respect of personal injury. It is clear, therefore, that the requirement in paragraph 82-130(1)(c) of the ITAA 1997 is satisfied in this instance.

It is noted that the severance payment was calculated to include a tax free redundancy amount which is shown on the PAYG Payment Summary at Lump sum D.

As stated in the Deed your client agreed to resign from employment and there is no evidence to indicate your client's position was made redundant.

Therefore the amount shown on the PAYG Payment Summary at Lump sum D is not exempt from being an employment termination payment under paragraph 82-135(e) of the ITAA 1997 as a genuine redundancy payment.

Consequently, the payment is considered to be an employment termination payment as the payment satisfies all the requirements in section 82-130 of the ITAA 1997, and is not specifically excluded under section 82-135.

Consideration will now be given as to whether the payment includes an invalidity segment.

Invalidity segment

Subsection 82-150(1) of the ITAA 1997 states that:

An employment termination payment includes an invalidity segment if:

(a) the payment was made to a person because he or she stops being gainfully employed; and

(b) the person stopped being gainfully employed because he or she suffered from ill-health (whether physical or mental); and

(c) the gainful employment stopped before the person's last retirement day; and

(d) 2 legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the person can ever be gainfully employed in capacity for which he or she is reasonably qualified because of education, experience or training.

For the payment to include an invalidity segment all the requirements under subsection 82-150(1) of the ITAA 1997 will need to be satisfied.

Gainful employment

Section 995-1 of the ITAA 1997 defines being gainfully employed as follows:

gainfully employed means employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.

Until your client became ill your client was employed on a full time basis with the employer.

Payment for stopping gainful employment

As stated above the severance payment is considered to be a payment made on the termination of your client's employment as it satisfied the conditions under subparagraph 82-130(1)(a) (i) of the ITAA 1997.

Employment termination occurred because of ill-health

The requirement under paragraph 82-150(1)(b) of the ITAA 1997 is that the termination of employment resulted from the taxpayer's ill-health, that is, the ill-health was the immediate cause for the termination of the taxpayer's employment.

In this case, the facts show the termination of employment in the fourth quarter of the 2010-11 income year occurred after your client was unable to resume normal work. Due to your client's illness your client agreed to terminate employment. Therefore, it is considered that this requirement is satisfied.

Termination of employment occurred before last retirement date

The third condition for a payment to qualify as an invalidity component is that it was made before the taxpayer's last retirement date. The payment was made in the fourth quarter of the 2010-11 income year when your client was under preservation age and well before the normal retirement age of 65. Therefore, the condition of paragraph 82-150(1)(c) of the ITAA 1997 has been satisfied.

Certification from 2 legally qualified medical practitioners that the disability is likely to result in the taxpayer being unable ever to be employed.

In respect of this requirement, it must be demonstrated that the disability at the time of termination was such that:

· it is unlikely that the person can ever be gainfully employed in capacity for which he or she is reasonably qualified because of education, experience or training.

Therefore, paragraph 82-150(1)(d) of the ITAA 1997 requires that there must be the likelihood that the disability of the taxpayer will preclude the taxpayer from ever being employed in a role, for which the taxpayer is reasonably qualified.

Prior to 1 July 1994, it had only been necessary for the termination of employment to occur because the taxpayer was physically or mentally incapacitated and therefore unable to engage in that employment. It did not require there be incapacity to engage in any employment. However, amendments made to the section that applied prior to 1 July 2007, section 27G of the ITAA 1936, by the Taxation Laws Amendment (Superannuation) Act 1992 require the incapacity to prevent the taxpayer ever being able to undertake any employment for which the taxpayer is reasonably qualified.

The EM to the Taxation Laws Amendment (Superannuation) Bill 1992 confirms this. In explaining the test for invalidity, the EM stated the following:

To clarify the test for incapacity and to place the onus of determining invalidity on legally qualified medical practitioners, from 1 July 1994 the incapacity of the person will have to be certified by two medical practitioners.

…the invalidity payment concession is extended only to people who are unable to undertake any form of employment for which they are reasonably qualified. A person who is unable to continue his or her current employment, but is able to undertake other appropriate employment, will not have access to the concession.

Therefore, a person, who is unable to continue to perform the duties of his or her current employment, but is able to undertake other appropriate employment for which they are reasonably qualified, would not now satisfy the condition in paragraph 82-150(1)(d) of the ITAA 1997, which is the rewritten provision for section 27G of the ITAA 1936.

However, the use of the term 'appropriate employment' in the EM suggested the intention that the term 'reasonably qualified' be interpreted as meaning neither over nor under qualified to any significant extent.

Even if a taxpayer's employment is terminated by reason of disability, this does not mean that the second part of test for invalidity is satisfied. The two parts are independent. The fact that the medical practitioners have to determine invalidity does not mean that the medical practitioners have to determine the reason for termination.

A person's employment can be terminated because of disability, irrespective of whether two medical practitioners form an opinion as to whether the disability will prevent the taxpayer from ever being able to be employed in a capacity for which the taxpayer is reasonably qualified because of education, training or experience.

Further, the requirement that the disability is likely to result in the taxpayer being unable ever to be employed in a capacity for which he or she is reasonably qualified extends to full-time employment, part-time or casual employment. A person who is not able to work full-time but can work part-time or casual in any employment for which the taxpayer is reasonably qualified will not receive the concessional component.

In this case, after examining the contents of the medical reports provided it is considered that there are two medical certificates that satisfy the requirement prescribed in paragraph 82-150(1)(d) of the ITAA 1997.

Two legally qualified medical practitioners, have certified, in two medical certificates, that your client is suffering from a medical condition the result of which, in their opinion, it is unlikely that your client can ever be gainfully employed in any capacity for which your client is reasonably qualified because of education, experience and training.

Therefore, as two medical practitioners have provided certificates that attest to your client being unable to ever be employed in a capacity for which your client is reasonably qualified because of education, training or experience, it is considered that the final condition of subsection 82-150(1) of the ITAA 1997 has been satisfied.

Components of an employment termination payment

Under section 82-140 of the ITAA 1997 the invalidity segment included in an employment termination payment is tax free.

An employment termination payment made after 1 July 2007 comprises the following components:

· Tax free component this includes the invalidity segment or pre-July 83 component (if any); and

· Taxable component the amount remaining after deducting the tax free component from the total payment.

Calculation of invalidity segment

As your client has satisfied the requirements for the payment of an invalidity segment, an element of the employment termination payment received from the employer will be tax free.

The amount of the invalidity segment is worked out by applying the formula in subsection 82-150(2) of the ITAA 1997:

Work out the amount of the invalidity segment by applying the following formula:

Where:

· days to retirement is the number of days from the day on which the person's employment was terminated to the last retirement day.

· employment days is the number of days of employment to which the payment relates.

The amount calculated under the formula is the invalidity segment included in the employment termination payment which is tax free. The remaining amount is a taxable component to be included in your client's income tax return for the 2010-11 income year. As this amount is under the employment termination payment cap of $160,000, and your client has not yet reached preservation age, it will be taxed at 30% plus Medicare levy.

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