Edited version of private advice

Authorisation Number: 1051536760212

Date of advice: 3 July 2019

Ruling

Subject: Invalidity segment

Question

Does the employment termination payment received by a person (the Taxpayer) in the 2018-19 income year include an invalidity segment in accordance with section 82-150 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

Income year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The Taxpayer was employed by an entity (the Employer).

While working, the Taxpayer was involved with in an incident with a customer.

Subsequently, the Taxpayer was excluded from duty on full pay due to the incident while undergoing an internal disciplinary process.

Shortly after, the Taxpayer attended their General Practitioner (GP) and was diagnosed with a medical condition.

The Taxpayer was referred for treatment. The treatment continues to the present time.

At the initial disciplinary hearing meeting with the Employer, the Taxpayer was unable to continue the meeting.

The Taxpayer was subsequently certified unfit for work by their GP.

The Taxpayer was also referred to a treating doctor for evaluation and treatment.

The Employer requested a statement from the doctor, which was provided.

The Employer requested that the Taxpayer be assessed by a X. A report was provided to the Employer.

At all times during the process, the Taxpayer was represented by union officials when discussions were held with the Employer.

An offer was tabled by the Employer that the Taxpayer take a Voluntary Medical Retirement package with a lump sum payment plus holiday and long service leave entitlements due to their medical condition and concerns that the Taxpayer would not be able to return to their position.

The Taxpayer provided a medical statement from their GP which states that the Taxpayer's impairment permanently impacts their ability to perform their normal work tasks now and in the future. The GP also considered that it would be best for the Taxpayer to leave their current workplace.

The Taxpayer also provided a medical statement from x which states that the Taxpayer's impairment permanently impacts their ability to perform their normal work tasks now and in the future. x also considered that it would be best for the Taxpayer to leave their current workplace.

In early 2019, the Employer changed their offer to a Deed of Agreement (the Deed) in which the Taxpayer could resign from their position on medical grounds and receive a payout.

The Employer advised that the payment was not categorised as an invalidity payment. Rather, it was an agreed amount to be paid on cessation of employment was categorised as a 'golden handshake'.

The Taxpayer is aged less than 65.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 27G

Income Tax Assessment Act 1997 section 82-10

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

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

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

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 section 83-10

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 995-1

Reasons for decision

Summary

The employment termination payment received by the Taxpayer does not include an invalidity segment in accordance with section 82-150 of the ITAA 1997.

Detailed reasoning

When a person receives an employment termination payment under subsection 82-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997), part of the payment may be tax free if the termination occurred as a result of the person's ill health. This component is called an invalidity segment.

In this case the facts show that the lump sum payment you received upon the termination of your employment on medical grounds is an employment termination payment.

In order for any part of the payment to include an invalidity segment and be tax free, the payment must satisfy subsection 82-150(1) of the ITAA 1997, which states:

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.

Payment for stopping 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.

According to the facts of the case, the Taxpayer was gainfully employed by the Employer when their employment was terminated.

The payment received by the Taxpayer was a payment for the cessation of their employment and as such is considered to be a payment that was made to you because you stopped being gainfully employed. The condition under paragraph 82-150(1)(a) of the ITAA 1997 is thus satisfied.

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 that the Taxpayer's employment was terminated on medical grounds. The Deed states that the termination represented cessation on medical grounds. 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 during the 2018-19 income year well before the Taxpayer reached the normal retirement age of 65. Therefore, the condition 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 the final 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 1992confirms 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 the 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 the two reports do not satisfy the requirement prescribed in paragraph 82-150(1)(d) of the ITAA 1997.

Two legally qualified medical practitioners have certified, in two medical reports that the Taxpayer is suffering from a medical condition which impacts the Taxpayer's ability to perform their normal work tasks now and in the future. The medical practitioners have not certified that the Taxpayer can never again be employed in any capacity for which they are reasonably qualified because of education, experience and training.

Consequently, the final condition of subsection 82-150(1) of the ITAA 1997 is not satisfied.

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