Edited version of private advice

Authorisation Number: 1052036625462

Date of advice: 27 September 2022

Ruling

Subject:Employment termination payment

Question

Does the employment termination payment received by you in the 20XX-XX income year include an invalidity segment in accordance with section 82-150 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period ended:

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were employed by the Employer.

You sustained a disability during your employment and ceased working with them.

Your employment with the Employer was terminated during the 20XX-XX financial year as a result of your disability.

You made a claim through your employer's insurer for a disability payment due to the injury you suffered while working for the Employer.

In working through your claim, your Employer's insurer had stringent requirements to allow payment to be made, including medical reports by multiple medical practitioners.

Two qualified medical practitioners certified that you are unlikely ever again to engage in gainful employment for which you are reasonably qualified by education, training or experience.

The Employer's insurer agreed to pay out the amount. The Employer paid the full amount out to you as an employment termination payment, reported the full amount as a taxable payment, and withheld tax on the full amount.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 82-130

Income Tax Assessment Act 1997 section 82-140

Income Tax Assessment Act 1997 section 82-145

Income Tax Assessment Act 1997 section 82-150

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

When a person receives an employment termination payment (ETP) under subsection 82-130(1) of the 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)  two 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. While there was a difference in time between when the ETP was paid and his final day, this was due to a delay between when the claim was submitted, and when it was approved and paid.'

The payment received by you was a payment for the cessation of your 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 your employment was terminated on medical grounds, with the Employer's insurer's reason for the decision being based on your mental health condition. 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 20XX-XX income year well before you 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.

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 your case, two qualified medical practitioners have certified that you are suffering from a medical condition, which in their opinion states that you are unlikely ever again to engage in gainful employment for which he is reasonably qualified by education, training or experience.

Therefore, it is considered the requirement prescribed in paragraph 82-150(1)(d) of the ITAA 1997 is satisfied.

Based on the provided information your ETP satisfies all requirements prescribed under subsection 82-150(1) of ITAA 1997.

Tax exemption for an invalidity payment

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

The taxable component of an ETP is the amount of the payment less the tax free component of the payment.

As you have 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.

Section 82-145 of the ITAA 1997 states that the taxable component of an ETP is the ETP less the tax-free component.

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