Edited version of private advice

Authorisation Number: 1052128204697

Date of advice: 16 June 2023

Ruling

Subject: Employment termination payment

Questions

Question 1

Is the lump sum received by the Taxpayer in consequence of the termination of his/her employment from his/her Employer, an employment termination payment (ETP) under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Does any part of the lump sum represent an invalidity segment under section 82-150 of the ITAA 1997?

Answer

Yes

Question 3

Is the unused leave payment, paid on the termination of the Taxpayer's employment and comprising of unused annual leave and unused long service leave, subject to a tax offset under sections 83-15 and 83-85 of the ITAA 1997, respectively??

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1.    The Taxpayer was employed by his/her Employer for a period of XX years as a qualified pilot and night flying instructor.

2.    The Taxpayer commenced employment with the Employer on XX XXXX 19XX.

3.    The Taxpayer was diagnosed with a serious neck injury and numbness in his/her left arm that was determined to be caused by a combination of routinely wearing a 4kg helmet with night vision goggles and the vertical vibrations when flying.

4.    The Taxpayer visited several doctors and underwent an MRI. It was concluded from the MRI results that his injuries were severe enough to cause him to fail the medical tests required to continue as a helicopter pilot. The Taxpayer was subsequently grounded by the Civil Aviation Safety Authority ("CASA") and his pilot licence was withdrawn.

5.    As a result of his injuries, it was determined that the Taxpayer is unable to ever fly as a helicopter pilot again. The Taxpayer stopped flying on XX XXXX 2020.

6.    To support this application the Taxpayer provided medical certificates from two legally qualified medical practitioners certifying that, because of ill-health, it is unlikely that this Taxpayer can ever be gainfully employed in the capacity for which he is reasonably qualified because of education, experience, or training.

7.    Due to the Taxpayer's permanent incapacity and inability to ever pilot a helicopter again, the Taxpayer resigned from the Employer on XX XXXX 2022 with his final day of employment being XX XXXX 2022.

8.    The Taxpayer's termination payment totalled $XXX,XXX.XX gross, comprising of $XXX,XXX.XX of unused annual leave and unused long service leave, and an ETP of $X,XXX.XX.

9.    In the application, the Taxpayer states that his/her employer withheld tax of 47% from the ETP and has refused to classify it as an invalidity payment without confirmation from the ATO that the Taxpayer's termination is in consequence of invalidity.

10.  On XX XXXX 2023, the Taxpayer's claim under his/her total and permanent disablement ("TPD") policy within his/her superannuation fund, was approved.

11.  The Taxpayer's date of birth is XX XXXX XXXX (he/she was under 65 years of age at the employment termination date).

12.  To support this application the Taxpayer provided other medical and documentary evidence:

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 subparagraph 82-130(1)(a)(i)

Income Tax Assessment Act 1997 paragraph 82-130(1)(b)

Income Tax Assessment Act 1997 section 82-135

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 subsection 955-1(1)

Income Tax Assessment Act 1997 section 83-15

Income Tax Assessment Act 1997 section 83-85

Reasons for decision

Issues:

Summary

1.    The lump sum of $X,XXX.XX paid to the Taxpayer by his Employer upon his resignation is an ETP for the purposes of section 82-130 of the ITAA 1997.

2.    Based on the provided information the ETP contains an invalidity segment of $X,XXX.XX that is tax free. The remaining amount of $X,XXX.XX is a taxable component to be included in the taxpayer's income tax return for the 2022-23 income year.

3.    The Taxpayer will be entitled to a tax offset limiting the rate of tax to 30% on the payment of unused annual leave, as the payment was made in connection with a payment that includes the invalidity segment of an ETP.

4.    The taxpayer will be entitled to a tax offset limiting the rate of tax to 30% on the payment attributable to the unused long service leave for post 17 August 1993 period, as the payment was made in connection with a payment that includes an invalidity segment of an ETP.

Detailed reasoning

Question 1

Is the lump sum received by the Taxpayer in consequence of the termination of his/her employment from his/her employer, an ETP under section 82-130 of the ITAA 1997?

Employment termination payment

1.    By virtue of subsection 995-1(1) of ITAA 1997, an ETP is defined in subsection 82-130(1) of the ITAA 1997, which states that a payment is an ETP 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.

2.    Therefore, a payment will be an ETP if all the conditions in subsection 82-130(1) of the ITAA 1997 are satisfied. Failure to satisfy any one of the conditions under subsection 82-130(1) of the ITAA 1997 will result in the payment not being treated as an ETP.

Paid 'in consequence of' the termination of employment

3.    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 court decisions on the meaning of the phrase, the Commissioner's view on the meaning and application of the 'in consequence of' phrase is set out in Taxation Ruling TR 2003/13 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).

4.    While TR 2003/13 considered the meaning of the phrase 'in consequence of' that appeared in the former provisions of the Income Tax Assessment Act 1936 (ITAA 1936), the 2003/13 can still be relied upon as both the former provision on the ITAA 1936 and the current provisions, under the ITAA 1997, both use the term 'in consequence of' in the same manner.

5.    In paragraphs 5 and 6 of TR 2003/13 the Commissioner states:

5. ... a payment is received by a taxpayer in consequence of the termination of the taxpayer's employment 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.

6. The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is received in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

6.    At present case, the Taxpayer provided evidence to support that prior to his/her resignation from his/her employment, he/she suffered a serious neck injury and numbness in his/her left arm preventing him/her to control the helicopter. As a result of this impairment the Civil Aviation Safety Authority (CASA) terminated his/her pilot licence. Subsequent medical assessments determined that because of the ill-health, it is unlikely that he/she will ever be gainfully employed in the capacity of a qualified helicopter pilot.

7.    These medical assessments eventually led to the Taxpayer's resignation from his/her employment of a helicopter pilot. He/she resigned from his/her employment with the Employer on XX XXXX 2022, with his/her final day of employment being XX XXXX 2022.

8.    Resignation at the initiative of the employee is still considered a mode of employment termination.

9.    Accordingly, we are satisfied that the lump sum payment, received by the Taxpayer, was received in consequence of the termination of his/her employment as the payment would not have been made, but for the termination of the Taxpayer's employment. Hence, subparagraph 82-130(1)(a)(i) of the ITAA 1997 is satisfied.

The payment must be made within 12 months of the termination

10.  The Taxpayer resigned from his/her employment on XX XXXX 2022, with his/her final day of employment being XX XXXX 2022. The payment was made on XX XXXX 2022. Accordingly, the payment was received by the Taxpayer within 12 months after the termination of his employment. Paragraph 82-130(1)(b) of the ITAA 1997 was satisfied.

Payment is not mentioned in section 82-135 of the ITAA 1997

11.  Section 82-135 of the ITAA 1997 lists certain payments that are not ETPs.

12.  For example, subsections 82-135(c) and 82-135(d) of the ITAA 1997 state that ETPs do not include an unused annual leave payment and an unused long service leave payment, respectively.

13.  So, as the payment of $X,XXX.XX was paid to the Taxpayer in consequence of the termination of his employment, within 12 months of the termination and is not a payment mentioned under section 82-135 of the ITAA 1997, the payment is an ETP.

Conclusion

14.  The lump sum of $X,XXX.XX paid to the Taxpayer by his/her Employer upon his/her resignation is an ETP for the purposes of section 82-130 of the ITAA 1997.

Question 2

Does any part of the lump sum of $X,XXX.XX represent an invalidity segment under section 82-150 of the ITAA 1997?

Invalidity segment

15.  Subsection 82-150(1) of the ITAA 1997 states that:

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.

16.  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.

17.  The Taxpayer commenced his/her employment with the Employer on XX XXXX 19XX. His/her final day of employment was XX XXXX 2022.

Payment for stopping gainful employment

18.  The provided evidence supports that the Taxpayer suffered a serious neck injury and numbness in his/her left arm that resulted in CASA terminating his/her helicopter pilot licence. This then caused that the Taxpayer was no longer able to work in his/her capacity as a qualified helicopter pilot. He/she resigned from his/her employment with final day being XX XXXX 2022.

19.  We are satisfied that the ETP was made to the Taxpayer as a result of ceasing his/her gainful employment. This requirement has been satisfied.

The employment termination occurred because of the ill-health of the taxpayer

20.  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.

21.  In this case, the provided evidence shows that the Taxpayer suffered a serious neck injury and numbness in his/her left arm, which resulted in CASA terminating his/her pilot licence, resulting in him/her being grounded as a helicopter pilot. Consequently, the Taxpayer was unable to be gainfully employed in his/her capacity as a qualified helicopter pilot and his/her employment was terminated on XX XXXX 2022

22.  This supports that the Taxpayer was unable to resume his/her normal work duties due to his ill-health. Therefore, it is considered that this requirement has been satisfied.

The termination of employment of the taxpayer occurred before the last retirement date in relation to the employment

23.  The third condition for a payment to qualify as an invalidity segment is that the termination of employment occurs before the taxpayer's last retirement day.

24.  The term 'last retirement day' is defined in section 995-1 of the ITAA 1997 as follows:

last retirement daymeans:

(a) if an individual's employment or office would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach the age or complete the period of service (as the case may be); or.

(b) in any other case - the day on which he or she would turn 65.

25.  The Taxpayer was born on XX XXXX 19XX so, his/her last retirement day at age 65, would be XX XXXX 20XX. The Taxpayer ceased gainful employment on XX XXXX 2022, which was well before his/her last retirement day.

26.  Therefore, the condition set out 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

27.  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.

28.  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.

29.  In this case, two qualified medical practitioners provided this Taxpayer with permanent incapacity statements, certifying that, because of ill-health, it is unlikely that this Taxpayer can ever be gainfully employed in the capacity for which he/she is reasonably qualified because of education, experience, or training.

30.  Therefore, after examining the contents of the medical reports provided, it is considered the requirement prescribed in paragraph 82-150(1)(d) of the ITAA 1997 is satisfied.

Calculation of the invalidity segment

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

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

33.  As the Taxpayer satisfied the requirements his/her termination was due to invalidity, an element of the ETP received from the Employer will be tax free.

34.  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:

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.

35.  Based on the above calculation, the $X,XXX.XX invalidity segment included in the ETP is tax free. The remaining amount of $X,XXX.XX is a taxable component to be included in the Taxpayer's income tax return for the 2022-23 income year.

Question 3

Is the unused leave payment totalling $XXX,XXX.XX, paid on the termination of the Taxpayer's employment and comprising of unused annual leave and unused long service leave, subject to a tax offset under sections 83-15 and 83-85 of the ITAA 1997, respectively?

Tax offset on unused annual leave and unused long service leave

36.  Section 83-10 (2) of the ITAA 1997, states that your assessable income includes an unused annual leave payment.

37.  Section 83-15 of the ITAA 1997 then states that:

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.

38.  Based on the above, the Taxpayer will be entitled to a tax offset limiting the rate of tax to 30% on the payment of unused annual leave, as the payment was made in connection with a payment that includes the invalidity segment of an ETP (section 83-15 of the ITAA 1997).

39.  Subsections 83-85(1) and 83-85(2) of the ITAA 1997 provide similar entitlement for unused long service leave. They state that:

40.  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%.

The amount is the part of the unused long service leave payment included in your assessable income under section 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 consist of, any of the following:

c)            (i) a *genuine redundancy payment;

d)            (ii) an *early retirement scheme payment;

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

41.  Based on the above, the Taxpayer will be entitled to a tax offset limiting the rate of tax to 30% on the amount of unused long service leave attributable to the post 17 August 1993 period, as the payment was made in connection with a payment that includes an invalidity segment of an ETP (section 83-85 ITAA 1997).

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