Edited version of your written advice

Authorisation Number: 1012824857901

Date of advice: 17 June 2015

Ruling

Subject: Employment termination payment

Question 1

Does the employment termination payment you received in the 2014-15 income year include an invalidity segment under section 82-150 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes

Question 2

Will a concessional tax treatment apply to the payment you received in the 2014-15 income year for unused annual leave and long service leave?

Answer 2

Yes

This ruling applies for the following period

Income year ended 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts and circumstances

1. The Taxpayer was born on dd/mm/yyyy.

2. The Taxpayer completed Year X, when they commenced employment. Their work history below shows that their roles have not required formal qualifications.

a. Commenced employment working as a labourer for six months, within which time they were injured, soon thereafter the employer closed;

b. Employed for several years collecting trolleys and picking up parcels;

c. Employed as a specific operator;

d. Employed for X years as in the cleaning field; and

e. On dd/mm/yyyy commenced their last employment.

3. Under further correspondence the Taxpayer's role was reviewed and their role was shown to be "Cleaner/Grounds". The Taxpayer's position statement was provided stating the "Dimensions of the Position"

4. The predominant qualification required for "Cleaner/Grounds" is demonstrated experience in cleaning duties, and the ability to use a range of equipment.

5. In their role the Taxpayer suffered from medical problems they sustained while in the role, and as a result they were not able to undertake all the activities required of them.

6. The Taxpayer was treated by a doctor at the request of their employer. After which, the Taxpayer was returned to full work duties.

7. The Taxpayer states that they worked with no restrictions until their surgery from which they returned to work.

8. The Taxpayer sought specialist treatment for their pain from various medical practitioners, including those sought by their employer.

9. The following two medical certificates have been provided.

a. The first certificate stated that the Taxpayer:

i. cannot undertake heavy lifting and frequent bending;

ii. can most likely perform administrative work;

iii. would require further re-training for an administrative type job; and

iv. the ability to return to work is dependent on the surgeon performing further treatment.

b. The second certificate stated that the Taxpayer:

i. cannot undertake physical duties, including driving / prolonged sitting;

ii. will not be able to return to their current physical job;

iii. was unsure what other work they could do; and

iv. may never return to any type of work given their background and vocational skills.

10. The Taxpayer's employer advised the Taxpayer as follows:

a. Under cover of their letter:

i. A medical assessment advised the Taxpayer's inability to return to work within twelve months and as such the medical retirement process continued, and that the Taxpayer had not lodged an appeal within 14 days of that letter to appeal the findings.

ii. Therefore, the Taxpayer's employment would cease on medical grounds.

b. The Taxpayer was provided the option to resign within 14 days of the date of this letter, failing which final monies, including any outstanding leave entitlements, namely annual leave and long service leave, together with 6 months payment in lieu of notice would be credited to the Taxpayer's bank account.

11. There is no evidence provided by the Taxpayer to state they had resigned.

12. An Employment separation certificate issued to the Taxpayer.

13. A PAYG payment summary eligible termination payment issued to the Taxpayer.

14. A PAYG payment summary issued to the Taxpayer:

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-10

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

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

Income Tax Assessment Act 1997 section 82-150

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

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

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 subsection 83-10(2)

Income Tax Assessment Act 1997 subsection 83-10(3)

Income Tax Assessment Act 1997 section 83-15

Income Tax Assessment Act 1997 section 83-75

Income Tax Assessment Act 1997 subsection 83-80(1)

Income Tax Assessment Act 1997 section 83-85

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

The Taxpayer's employment was terminated on grounds of ill-health. Therefore, the ETP does include an invalidity segment as defined in section 82-150 of the ITAA 1997.

The Taxpayer is entitled to a tax offset to ensure that the rate of tax on the unused annual leave and long service leave payments you received from your employer do not exceed 30%.

Detailed reasoning

Meaning of 'invalidity segment'

In accordance with subsection 82-150(1) of the ITAA 1997, an ETP 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 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.

Subsection 995-1(1) of the ITAA 1997 defines 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.

In this case, the payment was received by the Taxpayer as a result of the termination of their employment. As such, it is accepted that the payment was made to the Taxpayer because they stopped being gainfully employed for the purposes of paragraph 82-150(1)(a) of the ITAA 1997.

Paragraph 82-150(1)(b) of the ITAA 1997 requires that the termination of employment resulted from the Taxpayer's ill-health. That is, ill-health was the immediate cause for the termination of the Taxpayer's employment.

When characterising a particular payment for income tax purposes, and where, as here, there is an agreement between the parties which sets out the terms, conditions and circumstances under which the payment is made, the reason or reasons for the payment are determined by that agreement. Thus, in this case, the reason for the payment is to be determined with reference to the Taxpayer not resigning from their position, rather accepting the medical retirement offered by their employer.

Therefore, it is considered that the Taxpayer did stop being gainfully employed because they suffered from ill-health. As such, the requirement of paragraph 82-150(1)(b) of the ITAA 1997 is satisfied.

Paragraph 82-150(1)(c) of the ITAA 1997 requires that the Taxpayer's gainful employment stopped before their last retirement date.

The Taxpayer was XX when retired under medical grounds. Therefore, the requirement under paragraph 82-150(1)(c) of the ITAA 1997 is met.

Paragraph 82-150(1)(d) of the ITAA 1997 requires that two legally qualified medical practitioners have certified that, because of 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.

The Taxpayer has provided two medical certificates from two legally qualified medical practitioners confirming that they are unlikely to be gainfully employed in any capacity for which they are reasonably qualified because of education, experience and training. Therefore, the requirement under paragraph 82-150(1)(d) of the ITAA 1997 is met.

Therefore, the payment of $X received by the Taxpayer on termination of their employment does include an invalidity segment as defined in section 82-150 of the ITAA 1997.

Taxation of the employment termination payment

An employment termination payment is comprised of the following components:

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

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

As you have satisfied the requirements for the payment of an invalidity segment, a portion of the employment termination payment received from the employer will be tax free under paragraph 82-140(a) of the ITAA 1997

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:

Amount of employment __________Days to retirement__________

Termination payment Employment days + Days to retirement

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.

Please note however that subsection 82-10(3) of the ITAA 1997 entitles you to a tax offset that ensures that the rate of income tax on the taxable component, up to the 'applicable cap' amount does not exceed:

(a) if you are your preservation age or older on the last day of the income year in which you receive the payment -15%; or

(b) otherwise 30%

Note: The remainder of the taxable component is taxed at the top marginal rate in accordance with the Income Tax Rates Act 1986

Taxation of the unused annual leave and long service leave payments

According to your Employment separation certificate, your PAYG payment summary gross total included amounts for unused annual leave and long service leave.

The payment you received from your employer for unused annual leave that you had accrued is an 'unused annual leave payment' under subsection 83-10(3) of the ITAA 1997.

According to subsection 83-10(3) of the ITAA 1997:

(3) A payment that you receive in consequence of the termination of your employment is an unused annual leave payment if:

(a) it is for annual leave you have not used; or

(b) it is a bonus or other additional payment for annual leave you have not used; or

(c) it is for annual leave, or is a bonus or other additional payment for annual leave, to which you were not entitled just before the employment termination, but that would have been made available to you at a later time if it were not for the employment termination.

Unused annual leave payments are included in your assessable income under section 83-10(2) of the ITAA 1997.

However, according to section 83-15 of the ITAA 1997:

You are entitled to a *tax offset to ensure that the rate of tax on an *unused annual leave payment does not exceed 30%, to the extent that:

(a) the payment was made in connection with a payment that includes, or consists of, any of the following:

(i) a *genuine redundancy payment;

(ii) an *early retirement scheme payment;

(iii) the *invalidity segment of an *employment termination payment or *superannuation benefit; or

(b) the payment was made in respect of employment before 18 August 1993.

As it has already been established that the employment termination payment that you received includes an invalidity segment, the unused annual leave payment will be concessionally taxed in the manner outlined above.

The payment you received from your employer for unused long service leave that you had accrued is an 'unused long service leave payment' under section 83-75 of the ITAA 1997.

According to section 83-75 of the ITAA 1997:

A payment that you receive in consequence of the termination of your employment is an unused long service leave payment if:

(a) it is for long service leave you have not used; or

(b) it is for long service leave to which you were not entitled just before the employment termination, but that would have been made available to you at a later time if it were not for the employment termination.

Unused long service leave payments are included in your assessable income under section 83-80(1) of the ITAA 1997.

However, according to section 83-85 of the ITAA 1997

83-85(1)

You are entitled to a *tax offset on an *unused long service leave payment that ensures that the rate of income tax on the amount of the payment mentioned in subsection (2) does not exceed 30%.

83-85(2)

The amount is the part of the *unused long service leave payment included in your assessable income under subsection 83-80(1):

(a) to the extent that it is attributable to the *pre-18/8/93 period; and

(b) to the extent that it is attributable to the *post-17/8/93 period, if the payment was made in connection with a payment that includes, or consists of, any of the following:

(i) a *genuine redundancy payment; or

(ii) an *early retirement scheme payment; or

(iii) an *invalidity segment of an *employment termination payment or a *superannuation benefit.

As it has already been established that the employment termination payment that you received includes an invalidity segment and is wholly attributable to the post 17/08/1993 period, the unused long service leave payment will be concessionally taxed in the manner outlined above.

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