Edited version of private advice

Authorisation Number: 1012650220872

Ruling

Subject: Employment termination payment - capital payment

Question

Is any portion of the partial and permanent disability payment received by you in the relevant income year exempt from tax, as a capital payment for, or in respect of, a personal injury, in accordance with 82-135(i) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

The year ending 30 June 20XX

The scheme commenced on:

During the income year ended 30 June 20XX

Relevant facts and circumstances

1. You commenced employment with the Employer some time ago.

2. During the 200X income year, you involved in an accident while on duty. You were treated in hospital for your injuries.

3. You returned to work following your recovery, but your injuries remained a problem and affected your ability to work. After trying to do your normal work for a period of time, you found that you could not continue to because of the problems associated with your injury.

4. Consequently, for a period of time between the 200X income year to the 20YY income year, you were unable to work in your normal duties. During that time, you carried out office duties or similar suitable duties with the Employer up until sometime in the 20XX income year when you were advised that no further suitable duties were available for you.

5. You have provided a medical report dated in the 20YY income year which provides an independent assessment of your injuries. The doctor made statements regarding your capacity for work indicating:

• The taxpayer is not expected to regain the capacity to resume their substantive position given the permanent limitation imposed upon them by their injury.

• The taxpayer will not regain capacity to resume their pre-injury duties. The taxpayer has permanent limitations involving their injury and has reached maximum medical improvement, which would preclude them from carrying out the full substantive duties.

• The taxpayer meets the criteria for a partial permanent disability under the relevant Award.

• The taxpayer would be able to carry out alternative roles at an employer external to the Employer, such as training not requiring physical activity outside the limitations described, clerical/administrative/managerial work, provided they had the appropriate skills and training to effectively carry out such work

6. During the relevant income year, you were terminated from employment and received a partial and permanent injury benefit pursuant to the Award.

7. The Award provided that an employee who suffers an on duty injury shall receive rehabilitation and retraining leading to a return to pre-injury employment. Where a return to pre-injury employment is not possible, as medically assessed, the employee would be declared as suffering a partial and permanent disability and opportunities for permanent placement in suitable employment will be sought. If a permanent placement in suitable employment at the Employer was not possible, employment may be terminated and the employee may be paid a lump sum payment under the Award.

8. The terms of the benefit for the Award provided for a lump sum payment calculated as a multiple of salary at the date of disablement.

9. Your last retirement day at the Employer was in the 2020-21 income year.

10. In accordance with the terms of the Award, you received a payment from the Employer. A portion of the payment was for an Invalidity Segment. The payment was treated by the Employer as an employment termination payment (ETP).

11. You have requested an assessment for total and permanent incapacity under the Award but have not received a reply or outcome yet.

12. You contend that the payment was made as an insurance payment for your injuries from the Employer and should be tax free.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

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

Income Tax Assessment Act 1997 Section 82-135

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

Income Tax Assessment Act 1997 Section 82-140

Income Tax Assessment Act 1997 Paragraph 82-140(a)

Income Tax Assessment Act 1997 Section 82-150

Income Tax Assessment Act 1997 Section 955-1

Reasons for decision

Summary

1. The payment you received is not exempt from tax, as a capital payment for, or in respect of, a personal injury, in accordance with paragraph 82-135(i) of the ITAA 1997.

2. The payment you received is an employment termination payment (ETP) in accordance with 82-130(1) of the ITAA 1997 and is taxed accordingly.

Detailed reasoning

Employment termination payments

3. By virtue of subsection 995-1(1) of ITAA 1997, employment termination payments are defined in subsection 82-130(1) of the ITAA 1997, which 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.

4. To determine if a payment is an ETP, all the conditions in subsection 82-130(1) of the ITAA 1997 must be satisfied. Failure to satisfy any of the conditions under subsection 82-130(1) will result in the payment not being considered an ETP.

5. Furthermore, any termination payments received more than 12 months after the termination 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.

Paid as a 'consequence of' the termination of your employment

6. For a payment to be treated as an ETP, the first condition that must be met is that the payment is made in 'consequence of' the termination of employment of the taxpayer.

7. The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Taking into account the courts' decisions on the meaning of the phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are set out in Taxation Ruling TR 2003/13 entitled "Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of'" (TR 2003/13).

8. While TR 2003/13 considered the meaning of the phrase 'in consequence of' in the context of the eligible termination payments, TR 2003/13 can still be relied upon as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner.

9. 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.

10. In this case, you were on duty when you were injured during the 200X income year. You returned to work following your recovery, but your injury remained a problem and affected your ability to work in your normal duties. After trying to do your normal work, you found that you could not continue to because of the problems associated with the symptoms of your injury.

11. Consequently, for a period of time between the 200X income year to the 20YY income year, you were unable to work in your normal duties. During that time, you carried out office duties or similar suitable duties with the Employer up until sometime in the relevant income year when you were advised that no further suitable duties were available for you.

12. During the 20YY income year, an independent doctor deemed that you have a partial permanent disability.

13. During the relevant income, you were terminated from employment and received a benefit for partial and permanent disability pursuant to the Award.

14. The Award provided that an employee who suffers an on duty injury shall receive rehabilitation and retraining leading to a return to pre-injury employment. Where a return to pre-injury employment is not possible, as medically assessed, the employee would be declared as suffering a partial and permanent disability and opportunities for permanent placement in suitable employment will be sought. If a permanent placement in suitable employment at the Employer was not possible, employment may be terminated and the employee may be paid a lump sum payment under the Award.

15. Hence, the payment was made to you because the Employer could not find you suitable employment within the Employer following your injury that left you with a partial permanent disability. In other words, but for the termination, the payment would not have been made to you. Therefore, it is considered that the payment was made to you 'in consequence of' the termination of your employment with the Employer.

Payment is received no later than 12 months after termination

16. Your employment was terminated during the relevant income year and the payment was made to you less than 12 months after your termination. Therefore, this condition is satisfied.

Payment is not a payment mentioned under section 82-135 of the ITAA 1997

17. Based on the information provided, the only payments listed in section 82-135 of the ITAA 1997 which may be relevant in this case and thus require consideration are:

• a capital payment for, or in respect of, personal injury

Capital payment for, or in respect of, personal injury

18. Under paragraph 82-135(i) of the ITAA 1997 (paragraph (i) exclusion), for a payment to be excluded from the definition of an employment termination payment there must be:

• a capital payment;

• for, or in respect of, personal injury; and

• the payment must be reasonable, having regard to the nature of the personal injury and its likely effect on your capacity to derive income from personal exertion

19. It is proposed to look at each of these requirements in turn.

Capital payment

20. The paragraph (i) exclusion requires the receipt of a payment that compensates or reimburses the taxpayer for or in respect of the particular injury.

21. The payment must be a capital payment, not income. Payments that would be income under ordinary concepts, such as salary and wages or periodic workers' compensation payments, are not capital payments.

22. In this case a lump sum payment was made to you. The payment, in your hands, is not one that is received in a regular, recurrent or periodic manner through deriving your income. The payment is a one-off payment for the reasons set out under the Award. Accordingly, the amount is considered to be a 'capital' payment.

For, or in respect of, personal injury

23. The AAT has considered the meaning of 'personal injury', in respect of termination payments. The decisions in both Case 11,722 and McMahon v FC of T [1999] AATA 5; (1999) 41 ATR 1056; (1999) 99 ATC 2025 (McMahon's Case), cited Graham v. Robinson [1992] 1 VR 279 (Graham v. Robinson), and held that personal injury does not extend beyond physical injury or mental illness.

24. Flowing from these decisions, it can be said that only an injury that involves physical injury and/or mental injury that is clearly discernible to a qualified medical practitioner falls within the meaning of the term 'personal injury' as used in the paragraph (i) exclusion.

25. Based on the documents you have provided for this case, your injuries have satisfied the meaning of a 'personal injury'.

26. Furthermore, consideration is made as to whether the payment was made 'for, or in respect of', personal injury.

27. In Scully v. Commissioner of Taxation (1998) 84 FCR 41; (1998) 39 ATR 213; (1998) 164 ALR 281; (1998) 98 ATC 4671, in relation to former section 27A(1)(n) of the Income Tax Assessment Act 1936 (ITAA 1936), the Federal Court considered the meaning of 'in respect of personal injury' and states that:

The words ``in respect of personal injury'' are to be given a meaning which extends beyond what would otherwise be included by use of the expression

``for personal injury''. While both expressions ``for'' and ``in respect of'' require a connection between the consideration and the injury, the expression ``for'' denotes a more immediate connection. For example, an order of a court or tribunal awarding general damages for a broken leg could be said to be an award made for personal injury in the sense of being compensation for the disability arising from that injury.

…

In order to resolve the present question, it is necessary to consider the bases on which the payment has been made. Under cl 2.4.1 of the Deed, set out above, the obligation on the Trustees to pay the benefit arises in the event of termination of employment on the grounds of total and permanent disablement. There are two elements in this description of the event which give rise to an entitlement. The first is termination of employment. The second is that termination must be on the ground of total and permanent disablement. As seen earlier, the term ``disablement'' is defined as disablement caused through a number of matters; the relevant one for present purposes being ``bodily injury''. This latter term equates with the expression ``personal injury''. Clause 3.5.1 of the Deed is concerned with such a payment made in the event of total and permanent disablement whilst in the employ of the employer. If the member becomes totally and permanently disabled during the employment then the entitlement arises.

The member's entitlement, under the Deed, in the present case, arises not simply upon termination of employment alone but upon termination on the ground of total and permanent disablement. This is a composite requirement. It is an essential requirement of any entitlement that it arise because of the total and permanent disablement, which results from bodily or physical injury. Therefore, in a practical and significant respect, the payment is made as a consequence of the underlying basis of personal injury. A classification of the personal injury as being simply a condition precedent

28. In this case, the payment was made to you after satisfying the terms contained in the Award. There were two conditions that had to be satisfied in order for you to be eligible for the payment:

1. There was no suitable employment for you within the Employer and hence you are terminated from your employment; and

2. You had suffered a partial and permanent disability while on duty.

29. From this, it can be concluded that you would not have received the payment, had you not met the criteria of 'partial and permanent disability' which resulted from suffering 'personal injury'.

30. Accordingly, the payment is considered to have been made 'in respect of' personal injury.

'Reasonable' having regard to the nature of the personal injury

31. The final requirement under the paragraph (i) exclusion is that the consideration is excluded from being an employment termination payment to the extent that it is reasonable, having regard to the nature of the injury and its likely effect on the capacity of you to derive income from personal exertion.

32. In Commissioner of Taxation v. Scully [2000] HCA 6; 2000 ATC 4111; (2000) 43 ATR 718; (2000) 169 ALR 459; (2000) 74 ALJR 504; (2000) 201 CLR 148, the High Court held that compensation must be calculated by reference to the nature and extent of the injury or likely loss to the taxpayer.

33. In other words, the amount of the capital payment must have been determined with the nature and effect of the personal injury in mind.

34. Further, the full Federal Court case Dibb v. Commissioner of Taxation (2004) 207 ALR 151; 2004 ATC 4555; (2004) 55 ATR 786; (2004) 136 FCR 388; [2004] ALMD 5780; [2004] FCAFC 126 (Dibb's Case), while considering whether any part of a settlement payment was in respect of personal injury, Justices Spender, Dowsett and Allsop accepted the argument of Justice Heerey in Dibb v. Federal Commissioner of Taxation 2003 ATC 4613; (2003) 53 ATR 290; [2004] ALMD 5781; [2003] FCA 673 (Dibb), saying:

45. As to this matter, the reasons of the primary Judge were as follows [ATC at 4618]:

"32. Before the Commissioner on the objection hearing were two medical certificates dated respectively 21 July 1997 and 19 December 2002 from Dr Jim Ryan of Wishart, Queensland. In the first of these reports Dr Ryan stated:

'This is to certify that I have been treating Mr Dibb for Anxiety/Depression since September 1996. This I believe has come about I believe as a result of losing his job. Currently he takes anti-depressant medication with a gradually increasing dosage. He received a medical certificate excusing him from Jury Duty partly because of his serious condition.'

33. In the second certificate Dr Ryan stated:

'This is to certify that I am treating this (patient/man) for dermatitis, hypertension, gastrointestinal disorder and depression.'

34. Counsel for the Commissioner accepted that, in an appropriate case, a single payment made in consequence of the termination of employment of a taxpayer may be apportioned amongst several heads to which it relates. One of those heads could be consideration in respect to personal injury within the meaning of s 27A(1)(n). To that extent the payment may be treated as not being an ETP.

35. 'Personal injury' encompasses injury or disease of a physical or psychological nature. However it would not extend to anguish, distress or embarrassment of the kind traditionally taken into account in assessing damages for defamation:
FC of T v Scully 2000 ATC 4111 at 4119 [28]; (2000) 201 CLR 148 at [28],
Graham v Robinson [1992] VR 279.
However, even accepting that some of the complaints of damage the applicant raised in the Federal Court proceeding consisted of anxiety and depression and thus personal injury', the Commissioner was correct in concluding there was no way of dissecting the total settlement sum to include an amount for such a payment:
McLaurin v FC of T (1961) 12 ATD 273; (1960-1961) 104 CLR 381."

46. The last sentence of [35] of the primary Judge's reasons contains a premise with which we agree. The occasion for apportionment pursuant to par 27A(1)(n) only arises if there can be said to be ''consideration of a capital nature for, or in respect of, personal injury to the taxpayer...''. Here, it is impossible to say whether there was or was not personal injury. AVCO denied it. The section does not provide for ''consideration... of, or in respect of, allegations of personal injury.'' As can be seen from the description of the allegations in the Federal Court proceedings and the terms of the deed, there was no agreement between the parties that Mr Dibb had suffered personal injury. It was submitted on his behalf (as it had to be) that the respondent was obliged to sit, in effect, as a tribunal to decide whether he suffered personal injury and if so, the amount of a reasonable payment therefor. We disagree. The respondent was correct, as was his Honour, in concluding that it was impossible to identify any part of the total sum of $788,544 as consideration for, or in respect of personal injury.

35. From these decisions, it can be seen that where a payment made is under a judicial decision, deed of settlement or similar instrument, for any part of that payment to be considered a reasonable amount:

_ the instrument must state that part of the payment is being made in respect of 'personal injury';

_ the payment made in respect of 'personal injury' must be calculated with reference to the effect of the injury on the taxpayer to earn future income from personal exertion; and

_ the amount being paid in respect of 'personal injury' should be specified.

36. It is not necessary, however, that the payment for personal injury be made separately from other payments made under a legal instrument.

37. Applying these principles to this case, the lump sum amount you received is not considered to be a 'reasonable amount in respect of personal injury' based on the following reasons:

1. The Award does not state that part of the payment being made to you was in respect of 'personal injury'.

2. You received a lump sum payment calculated using a multiple based on your age and salary. As such, the nature of the personal injury suffered by you was not a factor that was considered in relation to the lump sum payment; and

3. The amount being paid in respect of 'personal injury' is not specified.

38. In other words, there is no evidence that the payment was in any way calculated with regard to the nature of your personal injury and its likely effect on your capacity to derive income from personal exertion.

Conclusion

39. As all the requirements under paragraph 82-135(i) of the ITAA 1997 are not met, the payment you received is not exempt from tax, as a capital payment for, or in respect of, a personal injury.

40. The payment is an ETP in accordance with 82-130(1) of the ITAA 1997 and is taxed accordingly.

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