Edited version of your private ruling

Authorisation Number: 1012376525289

Ruling

Subject: Invalidity segment of an employment termination payment

Question

Is any part of the employment termination payment (ETP) tax-free as an invalidity segment?

Answer

Yes.

This ruling applies for the following periods

1 July 2011 to 30 June 2012

The scheme commences on

1 July 2011

Relevant facts and circumstances

Prior to 2005, you took on part-time employment with an employer.

Recently, the employer determined that you were no longer fit to carry out your pre-injury duties with them.

The employer informed you that you had been terminated based on the grounds of permanent incapacity.

A PAYG payment summary for an ETP shows that the payment was made by the employer to you. The payment comprised a taxable component and an amount of tax withheld.

Your benefit is a partial and permanent incapacity calculated in accordance with the relevant award (the Award).

Two legally qualified medical practitioners have issued Certificates of Incapacity, certifying that it is unlikely that you will ever be gainfully employed in the capacity for which you are reasonably qualified because of education, experience or training. Both practitioners certified that you had been suffering from ill-heath for over 5 years.

Your normal age of retirement, if not injured, would have been 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-140.

Income Tax Assessment Act 1997 Section 82-150.

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

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

Reasons for decision

Summary of decision

A part of the employment termination payment (ETP) that you received from the employer in the 2011-12 income year is tax-free as an invalidity segment.

The remaining amount will remain as a taxable component of an ETP which is to be included as part of your assessable income in your income tax return for the 2011-12 income year.

Detailed reasoning

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.

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 you became injured, you were employed on a part-time basis with your employer.

Payment for stopping gainful employment

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

The employment termination occurred because of the ill-health of the taxpayer

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

In this case, the facts show the termination of your employment with the employer occurred after the workplace fitness assessors determined that you were permanently unfit for substantive requirements of your current position with the organisation. Subsequently, your termination and partial and permanent incapacity benefit was approved by the Death and Disability Coordinator of the employer.

The termination of employment of the taxpayer occurred before the last retirement date in relation to the employment.

The third condition for a payment to qualify as an invalidity segment is that the termination of employment occurs before the taxpayers last retirement date.

In this case, your last day of service with the employer was well before your retirement age of 65. Therefore, the condition set out under 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.

In this case, two legally qualified medical practitioners have each certified that you are suffering from ill-health and, because of the ill-health, it is unlikely that you can ever be gainfully employed in a capacity for which you are reasonably qualified by education, training or experience. Both medical practitioners also certified that you had been suffering from this ill-health for over five years.

As two medical practitioners have provided certificates that attest to you being unable to ever be employed in a capacity for which you are 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.

Tax exemption for an invalidity payment

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

An ETP 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.

As your client has satisfied the requirements for the payment of an invalidity payment, an element of the ETP 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.

Therefore, a part of the ETP which you received from the employer is tax-free as an invalidity segment and excluded from your assessable income in the year in which it was received (30 June 2012). The remaining amount will remain as a taxable component, and will be included in your assessable income and taxed at your marginal rate of tax.

Conclusion

The ETP payment satisfies all the requirements under subsection 80-150(1) of the ITAA 1997. Consequently a part of the ETP received by the employer is considered to be an invalidity segment for the purposes of subsection 82-150(1) of the ITAA 1997.

The remaining amount will remain as a taxable component of an ETP which is to be included as part of your assessable income in your income tax return for the 2011-12 income year.

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