Edited version of your private ruling

Authorisation Number: 1012547442868

Ruling

Subject: Employment termination payment - invalidity segment

Question

Does an employment termination payment (ETP) 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 ending 30 June 2014

The scheme commences on:

During the income year ending 30 June 2014

Relevant facts and circumstances

In early 1990s, the Taxpayer commenced employment with the Employer.

Some years later, whilst still employed by the Employer, the Taxpayer established an independent business (the Business).

The Business is operated through a private company as the trustee for the Taxpayer's family trust.

The Business provides certain specialist services.

The bulk of the services provided by the Business were performed by the Taxpayer.

Recently, the Taxpayer was medically retired by the Employer on the basis of partial and permanent incapacity.

Subsequently, the Taxpayer received an ETP from the Employer. The ETP did not include an invalidity segment and, as a result, was fully taxable.

Two medical practitioners have certified, on a standard form issued by a superannuation fund, that the Taxpayer is suffering from ill-health and, because of the ill-health it is unlikely that the Taxpayer can ever be gainfully employed in a capacity for which the Taxpayer is reasonably qualified by education, training or experience.

At the time of the termination of employment with the Employer, the Taxpayer continued working for the Business.

Currently, the Taxpayer works for the Business on a casual basis with another person assisting the Taxpayer as/when required.

The work experience gained by the Taxpayer prior to the termination of employment with the Employer includes experience the Taxpayer applies in working for the Business.

The Taxpayer has not been assessed for total and permanent incapacity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-150.

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

Reasons for decision

Summary

The ETP received by the Taxpayer from the Employer does not include an invalidity segment because at the time the Taxpayer received the payment, the Taxpayer did not stop being gainfully employed. That is, although the Taxpayer ceased their employment with the Employer, the Taxpayer continued to be gainfully employed by the Business.

Detailed reasoning

In accordance with subsection 82-150(1) of the ITAA 1997, an ETP includes an invalidity segment if all of the following conditions are met:

a) the payment was made to a person because he or she stopped 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 cessation of employment occurred 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 the capacity for which he or she is reasonably qualified because of education, experience or training.

The term 'gainfully employed' is defined in subsection 995-1(1) of the ITAA 1997 to mean:

employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.

Section 82-150 of the ITAA 1997 is a rewrite of former section 27G (Invalidity payments) of the Income Tax Assessment Act 1936 (ITAA 1936) which was repealed as of 1 July 2007. The Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Act 2007 (EM) which enacted section 82-150 states:

4.1 Schedule 2 to this Bill establishes the taxation treatment of employment termination payments as a result of the Government's Simplified Superannuation reforms.

4.3 Schedule 2 also contains a number of provisions to move associated payments from the Income Tax Assessment Act 1936 (ITAA 1936) into the Income Tax Assessment Act 1997 (ITAA 1997). These provisions retain the same effect as under existing law but have been rewritten to reflect the current drafting style and to deliver legislative simplification.

The EM does not discuss the meaning of 'gainfully employed' as it relates to the invalidity segment of an ETP, however the Explanatory Memorandum to the Taxation Law Amendment Act 1992 which amended the former section 27G of the ITAA 1936 effective 1 July 1994 explains the test for invalidity payments and states:

The relevant test is also to be modified so that 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.

Based on the above, the Commissioner considers that the ETP received by the Taxpayer from the Employer does not include an invalidity segment in accordance with section 82-150 of the ITAA 1997. Specifically, the Commissioner considers that the requirements of paragraph 82-150(1)(a), have not been met in this case.

While the Commissioner accepts that the Employer made the payment to the Taxpayer because the Taxpayer ceased being employed by the Employer, it is the Commissioner's view that the payment was not made because the Taxpayer stopped being gainfully employed. This view is based on the following:

· The Taxpayer has not sought assessment for total and permanent incapacity.

· At the time the Taxpayer received the payment from the Employer, the Taxpayer did not stop working for the Business. In fact, the Taxpayer has continued to work for the Business to date.

· Services provided by the Business (and thus work performed by the Taxpayer) accord with the Taxpayer's work experience gained prior to terminating their employment with the Employer.

· There is no indication that, in giving their opinion on incapacity, the two medical practitioners considered the fact that the Taxpayer continued to be employed by the Business.