Edited version of private ruling

Authorisation Number: 1011681820247

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Ruling

Subject: employment termination payment and invalidity segment

Question 1.

Is the payment received by your client an employment termination payment as defined under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: Yes.

Question 2.

Is any part of the payment, received by your client, exempt from tax as an invalidity segment of an employment termination payment, as defined under section 82-150 of the ITAA 1997?

Answer: No.

Question 3.

Is your client entitled to a tax offset under section 83-15 of the ITAA 1997, in respect of any unused annual leave?

Answer: No.

This ruling applies for the following period

1 July 2008 to 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts and circumstances

Your client is under 65 years of age.

Your client commenced casual employment and later full-time employment with the employer.

Your client signed a Statement of Acceptance to a Letter of Contract for this later position.

This contract stated your client's employment could be terminated by the company or your client after giving one month's notice.

Your client suffered a workplace injury while working for the employer and your client received medical treatment before returning to full time work, after a week on light duties.

Your client continued working suffering ongoing intermittent symptoms, which varied in severity until the symptoms intensified on the job and your client was seen by the first aid person.

Your client submitted an Employee's Compensation Claim, because of this latest injury.

A medical practitioner ordered a medical examination that showed some definite deterioration and some treatment was undertaken by another medical practitioner.

Your client's general practitioner provided your client with a WorkCover medical certificate as being unfit for work because of the injury, for the purposes of a workers compensation claim. From that date your client was only fit to perform selected light duties.

A detailed medical report on your client's injuries was prepared by a specialist, for your client's solicitors. The prognosis for the continuing symptoms was that your client is permanently incapacitated for the full range of the pre-injury duties.

The specialist later added to the report that your client has a whole person impairment (WPI) of 14% that is entirely work/work-injury related.

Subsequently your client signed a Deed of Release (the Agreement) with the employer and terminated employment on that day.

The Agreement sets out the events that led to the signing as the Company decided to terminate the employment, due to the inability of your client to perform the inherent requirements of the position. Your client released all members of the company from all claims (with the exception of workers compensation claims).

The Agreement set out the payments of an ex-gratia payment, 2 months notice and accrued annual leave.

A PAYG payment summary - individual non-business dated 30 June 2009 stated for the 2008-09 income year your client was paid a particular gross payment from which tax was withheld.

A separate PAYG payment summary - employment termination payment shows your client was paid a taxable component from which tax was withheld.

A medical practitioner is still issuing WorkCover medical certificates that state you client is only fit for suitable duties.

In your letter you confirm your client was discharged from the employment as being unable to perform the duties.

A letter from the employer states that the payment is not a bonus but an ex-gratia payment.

Your client has not been employed since the termination of employment but is currently on workers compensation and receiving monthly payments from a worker's compensation insurer.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 27A(1).

Income Tax Assessment Act 1936 Paragraph 27A(1)(n).

Income Tax Assessment Act 1936 Section 27G.

Income Tax Assessment Act 1936 Sub-subparagraph 27G(b)(i)(B).

Income Tax Assessment Act 1936 Subsection 160ZB(1).

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Subection 82-130(1).

Income Tax Assessment Act 1997 Paragraph 82-130(1)(a).

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 Paragraph 82-130(1)(c).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Subsection 82-135(i).

Income Tax Assessment Act 1997 Subsection 82-150(1).

Income Tax Assessment Act 1997 Subparagraph 82-150(1)(a)(i).

Income Tax Assessment Act 1997 Paragraph 82-150(1)(d).

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 Subsection 83-80(1).

Income Tax Assessment Act 1997 Section 118-20.

Income Tax Assessment Act 1997 Section 118-22.

Income Tax Assessment Act 1997 Section 118-37.

Income Tax Assessment Act 1997 Paragraph 118-37(a).

Income Tax Assessment Act 1997 Subsection 301-20(2).

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Summary

No part of the ex-gratia payment made under the Deed satisfies the criteria for an invalidity payment, nor is it a payment for personal injury and it is not exempt under the capital gains tax (CGT) provisions, as it is assessable as an employment termination payment.

The ex-gratia payment is a taxable component of the employment termination payment to be included in your client's income tax return for the 2008-09 income year.

The unused annual leave that accrued after 18 August 1993 is included in your client's assessable income and is ordinarily subject to tax at your client's marginal rate of tax.

Detailed reasoning

Employment termination payment

From 1 July 2007, payments made in consequence of the termination of a taxpayer's employment are known as employment termination payments.

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states:

employment termination payment has the meaning given by section 82-130.

Subsection 82-130(1) of the ITAA 1997 states:

A payment is an employment termination payment if:

(a) it is received by you:

(b) in consequence of the termination of your employment; or

i. after another person's death, in consequence of the termination of the other person's employment; and

ii. it is received no later than 12 months after the termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

Therefore, it can be seen that a number of conditions need to be satisfied in order for the ex-gratia payment to be treated as an employment termination payment.

Failure to satisfy any of the conditions will result in the payment not being considered an employment termination payment.

Paid as a consequence of the termination of your employment

It should be noted that the phrase 'in consequence of the termination of your employment' is not defined in the legislation. However, both the Courts and the Commissioner have considered the meaning of this phrase.

In Taxation Ruling TR 2003/13 (TR 2003/13) the Commissioner has considered the meaning of the phrase 'in consequence of'.

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.

As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be:

… 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 made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

The phrase 'in consequence of termination of employment' has been interpreted by the courts in several cases.

Of note are the decisions made by the High Court in Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 (Reseck) and the Full Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325 (McIntosh).

In Reseck Justice Gibbs stated:

Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination… It is not my opinion necessary that the termination of the services should be the dominant cause of the payment.

While Justice Jacobs stated:

It was submitted that the words 'in consequence of' import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a 'following on'.

In looking at the phrase 'in consequence of' the Full Federal Court in McIntosh considered the decision in Reseck.

Justice Brennan considered the judgments of Justice Gibbs and Justice Jacobs in Reseck and concluded that their Honours were both saying that a causal nexus between the termination and payment was required, though it was not necessary for the termination to be the dominant cause of the payment.

Suffice it to say that both Courts' views were that for a payment to be made in consequence of the termination of employment it had to follow on as a result or effect of the termination of employment. Additionally, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient.

Furthermore, in Le Grand v Federal Commissioner of Taxation [2002] FCA 1258; (2002) 124 FCR 53; (2002) 195 ALR 194; 2002 ATC 4907; (2002) 51 ATR 39 (Le Grand), the issue before the court was whether an amount received by the applicant as a result of accepting an offer of compromise in respect of claims brought by him against his former employer, in relation to the termination of his employment was in whole, or in part, an ETP. It was held that a settlement payment for litigation in relation to a taxpayer's dismissal was an ETP.

Justice Goldberg stated:

I am satisfied that there is a sufficient connection between the termination of the applicant's employment and the payment to warrant the finding that the payment was made "in consequence of the termination" of the applicant's employment. I am satisfied that the payment was an effect or result of that termination in the sense that there was a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment.

Justice Goldberg concluded that the test for determining when a payment is made in consequence of the termination of employment is that which was articulated by Justice Gibbs in Reseck. Thus, for the payment to have been made in consequence of the termination of employment, the payment must follow as an effect or result of the termination of employment. As earlier stated in paragraph 6 of TR 2003/13, there must be 'a causal connection between the termination and the payment even though the termination need not be the sole or dominant cause of the payment'.

The Full Federal Court in Dibb v Federal Commissioner of Taxation [2004] FCAFC 126; (2004) 207 ALR 151; 2004 ATC 4555; (2004) 55 ATR 786, has applied the above decisions in finding that the payment received by the taxpayer under a Deed of Release to settle various causes of action against the employer following the termination of employment was an ETP.

Paragraph 31 of TR 2003/13 the Commissioner states:

It is clear from the decision in Le Grand, that when a payment is made to settle a claim brought by a taxpayer for wrongful dismissal or claims of a similar nature that arise as a result of an employer terminating the employment of the taxpayer, the payment will have a sufficient causal connection with the termination of the taxpayer's employment. The payment will be taken to have been made in consequence of the termination of employment because it would not have been made but for the termination.

The essence of this analysis is that if the payment follows as an effect or a result from the termination of employment, the payment will be made in consequence of the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. Hence the payment will be an employment termination payment unless the payment is specifically excluded under section 82-135 of the ITAA 1997.

The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

The facts of this case verify your client was employed by the employer. Your client suffered an injury through a work related incident while working for the employer. Later your client was not able to perform the inherent requirements of the position.

This culminated in the employer and your client signing a Deed, resulting in your client terminating employment on that day. Your client was advised of the terms that the employer proposed in relation to the cessation of your client's employment.

In exchange for any payments your client by signing this Agreement releases and discharges each and all members of the company from all Claims (with the exception of workers compensation claims).

The Deed provided for a list of termination payments including the ex gratia payment as well as another payment being two weeks in lieu of notice and any unused rostered days off. The remaining payment was for unused Post 17 August 1993 annual leave.

Your client agreed to settle all claims and all other employment related issues in the terms contained in the Deed and for your client's employment to terminate on that day. However, your client did not relinquish any claim to workers compensation claims that would relate to any injury or illness.

Therefore, it is evident from the facts provided that the termination payment being made to your client was made 'in consequence of the termination of employment'. There is a causal connection between the termination and the ex-gratia payment. The claims, the termination and the payment are all intertwined and connected. Therefore the first requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

The payment is received no later than 12 months after termination

The second condition for the ex-gratia payment to meet the criteria, as an employment termination payment is stated under paragraph 82-130(1)(b) of the ITAA 1997. The payment must be received within 12 months of your termination of employment, unless you are covered by a determination exempting you from the 12 month rule.

The facts of this case show that on the day your client's employment was terminated, your client mutually agreed with the employer to settle all claims and terminate employment. The termination payment was made to your client within 12 months of your client's termination of employment.

Therefore, it is considered that the ex-gratia payment satisfies the requirements of paragraph 82-130(1)(b) of the ITAA 1997.

The final requirement under paragraph 82-130(1)(c) of the ITAA 1997 is that the payment is not a payment mentioned in section 82-135 of the ITAA 1997.

Exclusions under section 82-135 of the ITAA 1997

Certain payments made on termination of employment are excluded from being an employment termination payment under section 82-135 of the ITAA 1997. These payments include any accrued annual and long service leave and the tax-free parts of a genuine redundancy payment or an early retirement scheme payment as well as other types of payments which do not apply to an employment termination payment.

In this case, consideration must be given as to whether the personal injury suffered by your client is covered by the specific exemption for personal injury in subsection 82-135(i) of the ITAA 1997 (payments that are not employment termination payments). This subsection states that employment termination payments do not include:

(i) a capital payment for, or in respect of, personal injury to you so far as the payment is reasonable having regard to the nature of the personal injury and its likely effect on your capacity to derive income from personal exertion (within the meaning of the definition of income derived from personal exertion in subsection 6(1) of the Income Tax Assessment Act 1936);…

This exclusion is for a payment or benefit that compensates or reimburses the taxpayer for or in respect of the particular injury.

In Commissioner of Taxation (Cth) v. Scully (2000) 201 CLR 148; [2000] HCA 6; 2000 ATC 4111; (2000) 43 ATR 718 (Scully) the High Court, in considering paragraph (n) of the definition of an eligible termination payment (ETP) in former subsection 27A(1) of the ITAA 1936 (paragraph (n)), held that compensation must be calculated by reference to the nature and extent of the injury or likely loss to the taxpayer.

In considering the meaning of personal injury for the purpose of the paragraph (n) exclusion, the AAT has cited Graham v Robinson [1992] 1 VR 279 (Graham v. Robinson), in both Case 11,722 and McMahon v FC of T [1999] AATA 5; (1999) 41 ATR 1056; (1999) 99 ATC 2025 (McMahons Case), and held that personal injury does not extend beyond physical injury or mental illness.

The Victorian Supreme Court had to decide if emotional hurt (that is, hurt, distress, public scandal, hatred, odium, ridicule and contempt) was a personal injury in its decision in Graham v. Robinson, where Smith J stated at 281:

In the absence of express authority, I have come to the conclusion that the expression personal injury does not extend beyond physical injury and mental illness to include emotional hurt. I am encouraged to this view by the fact that the law has rejected grief or sorrow as a form of injury which can be relied on to mount a claim in negligence: Mount Isa Mines Ltd. v. Pusey  (1970) 125 CLR 383, at p. 394 and Jaensch v. Coffey  (1984) 155 CLR 549, at p. 587. It is true that damages are awarded for pain and suffering in the typical personal injury case.  They are awarded, however, where pain and suffering flow from and are connected with physical or mental injury and may therefore be said to be damages in respect of personal injury.

Flowing from these decisions, it can be said that there are three types of injury a person can receive:

(a) behavioural injury - one that involves physical injury (internal and/or external) and/or mental injury that is clearly discernible to a qualified medical practitioner;

(b) non-behavioural injury - hurt, distress, anxiety, et cetera, that flows from the death of, or serious injury to, a relative or close friend; wrongful dismissal; defamation; et cetera. This type of injury may have legal remedies under the law of torts (for example, defamation, slander), statute (for example, sexual harassment, discrimination), or contract (for example, employment, professional negligence); and

(c) property injury - damage to a person's property.

Notwithstanding it may be said all three types of injury may be personal, it is considered only the first type (i.e. behavioural injury) falls within the meaning of the term personal injury as used in the paragraph (n) exclusion.

The decision in Graham v. Robinson was applied in McMahons Case in relation to a payment for alleged damage to a taxpayer's reputation. In McMahons Case, a critical performance appraisal of McMahon and other comments were published in the media. Subsequent to this, McMahons employment was terminated and it was agreed to pay him certain amounts including an amount for the alleged damage to his reputation. Senior Member Block stated:

26 The tribunal also notes the stipulation in the concluding portion of s27A(1)(n) of the ITAA 1936 that the amount of consideration for personal injury is to be regarded as an ETP only to the extent that it is reasonable having regard to the nature of the injury and the taxpayers capacity to derive income from personal exertion. The tribunal considers that the inclusion by the legislature of the words from personal exertion tends to confirm that the section is intended to exclude from the definition of ETP payments in respect of injuries to the person, where such injuries being physical injuries or mental illnesses which have an assessable and identifiable impact on the capacity of the taxpayer to earn income. The tribunal considers in summary that an injury to person is distinguishable from an injury to a persons reputation.

27 For the Reasons set out previously (and bearing in mind that the decision in Graham v. Robinson is binding on the tribunal), the reputation payment was not made in respect of personal injury within s27A(1)(n) of the ITAA 1936; accordingly the reputation payment was correctly assessable as an ETP.

To reiterate, for an amount to be excluded from the definition of an ETP by virtue of paragraph (n), there must be a behavioural type personal injury.

From 1 July 2007, paragraph (n) has been replaced by subsection 82-135(i) of the ITAA 1997. However, the Explanatory Memorandum (EM) to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 stated, in relation to section 82-135 of the ITAA 1997, that:

consistent with current legislation, certain payments are prevented from qualifying as employment termination payments.

It is therefore appropriate to cite cases that refer to the previous legislation.

The payment in Scully was held not to be in respect of personal injury. Acting Chief Justice Gaudron and Justices McHugh, Gummow and Callinan stated in their joint decision:

In our opinion, the payment in this case cannot be characterised as consideration... in respect of, personal injury. The fact that the payment is not calculated by reference to the nature and extent of the injury or likely loss to the respondent and the fact that the other benefits are similar to that for total and permanent disablement point inevitably to the conclusion that the payment was consideration... for, or in respect of the respondent's termination of employment and her rights under the Trust Deed and was not consideration... for, or in respect of her injury.

From the foregoing it is apparent that for an amount to meet the definition of consideration in subsection 82-135(i) of the definition of employment termination payment, the payment must be for personal injury and be calculated by reference to the nature and extent of the injury or likely loss to the taxpayer.

In your client's case, the ex-gratia payment is a single lump sum payment which bears no relation to a capital payment for, or in respect of, personal injury to your client.

Accordingly, it is considered that subsection 82-135(i) of the employment termination payment definition under section 82-135 of the ITAA 1997 does not apply to the payment.

It is clear, therefore, that the requirement in paragraph 82-130(1)(c) of the ITAA 1997 is satisfied in this instance.

Consequently, the ex-gratia payment would be considered to be an employment termination payment as the payment satisfies all the requirements in section 82-130 of the ITAA 1997, and is not specifically excluded under section 82-135 of the ITAA 1997.

Capital gain exemption

The general exemptions provisions (from CGT) are found in Subdivision 118-A of the ITAA 1997. Included amongst them is an anti-overlap provision, section 118-20, which ensures that an amount cannot be assessable under both the CGT provisions and non-CGT provisions. The effect of the provision is to reduce the amount of any assessable capital gain by any amount which is also assessable under non-CGT provisions or by amounts which are exempt income under non-CGT provisions.

Section 118-22 of the ITAA 1997 is a related section, which recognises that a CGT event could give rise to an employment termination payment as well as a capital gain. It ensures that, for the purposes of section 118-20 only, the whole of the payment is included as assessable income.

The combined effect of these two sections is that where a capital payment is assessable under a non-CGT provision (in this case as an employment termination payment) then it is treated as being assessable under that non-CGT provision.

Therefore an employment termination payment is excluded from being a capital gain.

A payment may be disregarded as a capital gain by the operation of section 118-37 of the ITAA 1997 (which replaced former subsection 160ZB(1) of the ITAA 1936 for the 1998-99 and later income years).

In this regard it is relevant to note the following comment made by Senior Member Dwyer of the Administrative Appeals Tribunal (AAT) in AAT Case 11,722 (1997) 35 ATR 1114; (1997) 97 ATC 258 at paragraph 31:

I accept Mr Gibb's submission that if the payment is caught, as I am satisfied it is, by s 27A(1), there is no advantage to the applicant in the fact that it would have been exempt by virtue of s 160ZB(1), if it were not so caught. …

In this case, as the ex-gratia payment is to be included as assessable income because it is an employment termination payment as defined under subsection 82-130(1) of the ITAA 1997, it is to be disregarded as a capital gain under sections 118-20 and 118-22. The fact that the payment may also be disregarded as a capital gain under section 118-37 does not change the fact that it is assessable as an employment termination payment.

Accordingly, no part of the settlement payment is assessable under the CGT provisions because it is included in the taxpayer's assessable income as an employment termination payment.

Invalidity segment

Where a person's employment has been terminated because of ill-health and the person receives an employment termination payment, part of the payment may be tax free. This component is called an invalidity segment.

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.

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.

The facts of this case indicate until becoming ill, your client was employed full-time by the employer.

Payment for stopping gainful employment

As stated above, the ex-gratia payment is considered to be a payment made on the termination of your client's employment as it satisfied the conditions under subparagraph 82-130(1)(a)(i) of the ITAA 1997.

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

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 i.e. the ill health was the immediate cause for the termination of the taxpayer's employment.

In this case, the facts show the termination of employment occurred after the employer took into consideration that your client was unable to resume normal work and your client was on a Workers Compensation medical certificate for light duties. Therefore, it is considered that this requirement is satisfied.

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

To qualify as an invalidity component, a payment must be made before a taxpayer's last retirement date. The payment was made when your client was under 60 years of age, well before the retirement age of 65. Therefore, the condition in 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 this requirement, it must be demonstrated that the disability 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 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 Income Tax Assessment Act 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 1992 confirms 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 your client's case the single medical certificate from a specialist certified that your client is suffering from a medical condition which, in his opinion, permanently incapacitates the client for physical work.

The certificate only certifies that your client is unable to perform physical work. The specialist did not certify that your client would ever be able to be employed in any paid employment.

In respect of medical certificates, Senior Member Pascoe of the Administrative Appeals Tribunal (AAT) made the following comment in Re Pitcher & Federal Commissioner of Taxation [2004] AATA 218; (2004) 2004 ATC 2042; (2004) 55 ATR 1056; [2005] ALMD 1372 (Re Pitcher), stating that the certification in the case, pursuant to sub-subparagraph 27G(b)(i)(B), was:

…provided after Mr Pitcher had already been in full-time employment. Dr Wood stated that Mr Pitcher "will never be fit for employment" after he had been employed for 1 year with him undertaking full-time employment some 6 months after the report. At the time of Mr Warne's report, Mr Pitcher was in full-time employment and had been in that same employment for 2 years.

In considering the taxpayer's cross-appeal against this finding made by the AAT, Justice Ryan of the Federal Court stated in Commissioner of Taxation v. Pitcher [2005] FCA 1154; (2005) 2005 ATC 4813 (Pitcher) that:

It is true that the expression have certified in [sub-subparagraph 27G(b)(i)(B)] is in the perfect tense. However the time at which the use of that tense signifies that the certificates must have issued is not when the termination payment was made but when it fell to be characterised as an invalidity payment in relation to the taxpayer...

I accept, as the Tribunal appeared also to accept, that s 27G reposes in the medical practitioners, not the Commissioner, the attainment of the requisite satisfaction that the taxpayer is unable to be likely ever to be employed in a relevant capacity. However, it remains a question of fact for the Commissioner or the Tribunal whether the two medical certificates on their face have properly answered the question posed by s 27G(b)(i)(B). On my reading of the two certificates in this case, I entertain considerable doubt whether that has occurred.

In the context of the decisions in both Re Pitcher and Pitcher, it follows that for the purposes of paragraph 82-150(1)(d) of the ITAA 1997, the time at which medical certificates are issued to your client in relation to the ex-gratia payment of $42,256.99 is no later than when the Commissioner considers your client's invalidity, i.e. at the time of making this private ruling.

However, it is also clear that where the facts of the case contradict the wording in a medical certificate the Commissioner must determine whether the certificate satisfies the requirements of sub-subparagraph 27G(b)(i)(B) of the ITAA 1936 and paragraph 82-150(1)(d) of the ITAA 1997.

The specialist certified in a medical certificate that your client, in their opinion, is suffering from a medical condition that is likely to result in your client being permanently incapacitated for physical work. However, another doctor stated in a WorkCover medical certificate your client is fit for light duties of picking and packing small orders. This is supported by a recent WorkCover medical certificate which made a similar opinion in regards to your client's fitness for suitable duties for the current period.

It is evident from the above mentioned medical reports the medical practitioners believe your client is able to engage in employment, other than heavy lifting duties.

It should also be noted that where additional education, training or experience are acquired between the time of an injury and the time a medical certificate intended to satisfy paragraph 82-150(1)(d) of the ITAA 1997 is prepared, the preparing medical practitioner must take them into account in making their declaration in the same way they must take into account all the employment training and experience acquired by the taxpayer, and not just that relating to the employment in which they were injured.

Even though the taxpayer in this case has not performed any work since leaving the employer, on the basis of the content of the WorkCover medical certificates provided, it is considered that the medical certificates provided do not meet the requirement prescribed in paragraph 82-150(1)(d) of the ITAA 1997.

As the ex-gratia payment paid to your client by the employer does not satisfy all the requirements under subsection 80-150(1) of the ITAA 1997, no part of the payment is considered to be an invalidity segment for the purposes of subsection 82-150(1) of the ITAA 1997.

The payment satisfies all three conditions pursuant to subsection 82-130(1) of the ITAA 1997. Therefore, the payment is considered an employment termination payment and accordingly, the entire amount is a taxable component of an employment termination payment to be included in your client's income tax return for the 2008-09 income year.

Taxation of employment termination payments

Employment termination payments cannot be rolled over into a complying superannuation fund, complying approved deposit fund (ADF) or to a retirement savings account (RSA) provider, unless the payment qualifies as a transitional termination payment under section 82-10 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA).

An employment termination payment made after 1 July 2007 will be comprised of the following components:

Tax fee component this includes the post-June 1994 invalidity or pre-July 83 component (if any); and

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

The taxable component is subject to tax, depending on the person's age, as follows:

Preservation age is the age at which retirees can access their superannuation benefits. This will be 55 for persons born before 1 July 1960 and between 55 and 60 for persons born after 30 June 1960.

The $145,000 cap on concessionally taxed employment termination payments is indexed annually to average weekly ordinary time earnings.

The taxable components of all life benefit employment termination payments received in an income year are counted towards this cap. Any tax-free amounts are not counted towards the cap.

Your client is over preservation age on the last day of the income year in which the payment is being made. Therefore, as the payment is under the $145,000 cap, the payment will be taxed at a maximum rate of 15% plus Medicare levy.

A tax offset will apply to ensure the amount of tax is not greater than 15% plus Medicare levy in accordance of subsection 301-20(2) of the ITAA 1997.

Unused annual leave and long service leave payments on termination of employment

When a person's employment is terminated, that person may receive lump sum payments for:

· unused annual leave (including leave loading); and/or

· unused long service leave.

How these payments are taxed will generally depend on when the relevant leave was accrued and the reason for the termination of employment.

Unused long service leave and unused annul leave that accrued on or after 18 August 1993

Unused long service leave and unused annual leave that accrued on or after 18 August 1993 is fully included in your assessable income (subsection 83-80(1) of the ITAA 1997) and is subject to tax at your marginal rate of tax. This amount is shown as part of your salary and wages on the PAYG payment summary.

Only where the payment is made in conjunction with a payment that includes the invalidity segment of an employment termination payment or superannuation benefit, then a tax offset applies to ensure that the tax rate applicable on the amount of the unused long service leave and unused annual leave that accrued on or after 18 August 1993, does not exceed 30%.

The Commissioner has no discretion to treat payments of unused annual leave and long service paid on termination of employment as being eligible for a tax offset if it is paid under a normal termination of employment.

Conclusion

The ex-gratia payment satisfies all three conditions pursuant to subsection 82-130(1) of the ITAA 1997 and is therefore considered to be an employment termination payment.

The employment termination payment paid to your client by the employer does not satisfy all the requirements under subsection 80-150(1) of the ITAA 1997. Consequently no part of the payment is considered to be an invalidity segment for the purposes of subsection 82-150(1) of the ITAA 1997.

Accordingly, the entire amount is a taxable component of an employment termination payment to be included in your client's income tax return for the 2008-09 income year.

The accrued unused annual leave after 18 August 1993 is included in your client's assessable income (subsection 83-80(1) of the ITAA 1997) and is subject to tax at your client's marginal rate of tax.