Edited version of your written advice

Authorisation Number: 1051357064842

Date of advice: 8 May 2018

Ruling

Subject: Permanent and partial disability lump sum payment – employment termination payment

Question

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

Answer

No

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your client commenced employment with an employer (the Employer) on a full time basis in a particular role (the Job) more than 20 years ago.

Your client’s employment was covered under an Award.

During the 201X-1Y income year your client suffered injuries in the course of employment and took time off during which your client received workers compensation.

Your client subsequently resigned the Job and accepted the Employer’s offer of casual employment.

Your client suffered a further injury and ceased employment with the Employer during the 201X-1Y income year.

Your client made an enquiry with the Employer as to entitlements under the Award and was advised your client had none.

During the 201X-1Y income year your client commenced legal proceedings seeking orders under an Industrial Relations Act (the Act).

In the 201X-1Y income year a Court (the Court) made its Judgement and Orders.

The Court documents provided show:

a. your client’s employment in the Job ceased because of permanent and physical disability.

b. the orders sought were made in favour of your client as your client was eligible for a lump sum payment under a clause (the Clause) in the Award.

The Clause, which relates to Partial and Permanent Disability (PPD), states that attempts are to be made by the Employer to rehabilitate and find a suitable placement for an employee suffering a PPD. If there is no suitable placement then then the employee’s employment can be terminated and a lump sum payment can be made to the employee. The lump sum payment is made in accordance with a formula specified in an attachment (the Attachment) to the Award.

A Payment Summary which was prepared by the Employer shows that lump sum payment payable to your client is calculated in accordance with the Attachment to the Award.

A letter from your client’s lawyers (the Lawyers) states amongst other matters that the lump sum payment (the Payment) is taxable as a delayed termination payment.

The Lawyers confirmed the Court’s findings of your client’s entitlement to a PPD payment under the Award and that the gross benefit amount, excluding any interest or cost, equates to the Payment.

The Commissioner of Taxation (the Commissioner), on the basis of information provided, has made a determination in accordance with paragraph 82-130(4)(a) and subsection 82-130(5) of the Income Tax Assessment Act 1997 (ITAA 1997) that the 12 month rule prescribed in paragraph 82-130(1)(b) of the ITAA 1997 will not apply.

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 paragraph 82-130(1) (b)

Income Tax Assessment Act 1997 subsection 82-130(5)

Income Tax Assessment Act 1997 section 82-135.

Income Tax Assessment Act 1997 section 955-1

Reasons for Decision

Summary

The payment your client will receive 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.

The payment your client will receive 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

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.

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.

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

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.

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).

While TR 2003/13 considered the meaning of the phrase ‘in consequence of’ in the context of 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.

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.

In this case your client’s employment ceased because of permanent and partial disability (PPD).

As a result of legal proceedings the Court was satisfied that an order be made in your client’s favour which require the Employer to pay your client a lump sum payment under the Clause of the Award which relates to PPD.

The Clause, which relates to Partial and Permanent Disability (PPD), states that attempts are to be made by the Employer to rehabilitate and find a suitable placement for an employee suffering a PPD. If there is no suitable placement then then the employee’s employment can be terminated and a lump sum payment can be made to the employee. The lump sum payment is made in accordance with a formula specified in an attachment (the Attachment) to the Award.

The payment to be made to your client arises from the Court’s confirming an entitlement to a lump sum for a PPD in accordance with the Clause. The above extract shows, a lump payment is made where there is a termination of employment as a result of the Employer not being able to find suitable placement for an employee with PPD. Accordingly, there is a definite nexus between the payment and termination employment. In other words, but for the termination, the payment would not have been made to your client. Therefore, it is considered that the payment payable to your client is in consequence of’ the termination of employment with the Employer.

Payment is received no later than 12 months after termination

The payment has still not been made and your client’s employment was terminated more than 12 months ago. Even though the payment will be made more than 12 months after your client’s termination of employment, the Commissioner has made a determination under subsection 82-130(5) of the ITAA 1997 that the 12 month rule will not apply.

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

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

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

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

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

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

Capital payment

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

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.

In this case a lump sum payment will be made to your client. The payment, in your client’s hands, is not one that is received in a regular, recurrent or periodic manner through your client deriving 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

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.

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.

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

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

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

In this case, the payment will be made to your client as a result of satisfying the terms contained in the Clause

In other words, there were two conditions that had to be satisfied in order for your client to be eligible for the payment:

● There was no suitable employment for your client within the Employer and hence your client was terminated from employment; and

● Your client had suffered a PPD while on duty.

From this, it can be concluded that your client would not have received the payment, had your client not met the criteria of PPD which resulted from suffering ‘personal injury’.

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

‘Reasonable’ having regard to the nature of the personal injury

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.

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.

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

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:

“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.

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.

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

Applying these principles to your client’s circumstances, the lump sum amount your client will receive is not considered to be an 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 your client was in respect of ‘personal injury’.

2. Your client will receive a lump sum payment calculated under the Attachment to the Award. This payment is calculated using a multiple based on your client’s age and salary. As such, the nature of the personal injury suffered by your client was not a factor that was considered in relation to the lump sum payment; and

3. No amount is specified as being paid in respect of ‘personal injury’ either in the Award or the Court Orders.

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

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

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

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