Edited version of your written advice

Authorisation Number: 1012993204763

Date of advice: 11 April 2016

Ruling

Subjects: Disability superannuation benefit; Employment termination payment

Questions

1. Is the total and permanent disablement (TPD) benefit received by the taxpayer in the relevant income year a disability superannuation benefit as defined by subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is the TPD benefit received by the taxpayer in the relevant income year an employment termination payment as defined by subsection 82-130(1) of the ITAA 1997?

Answers

1. No

2. Yes

This ruling applies for the following period:

Income year ended 30 June 2015

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The taxpayer commenced employment with the employer during the 19XX-XX income year.

During the course of their employment with the employer, the taxpayer suffered a workplace injury. As a result, their employment with the employer was terminated during the relevant income year.

Subsequently, the taxpayer made a claim for the payment of a TPD benefit pursuant to an industrial award (the Award) which the taxpayer was covered by.

In accordance with the terms of the Award:

(a) Benefits are payable on cessation of employment in the event of an injury that results in the death and total and permanent / partial and permanent disablement of an officer

(b) The scheme for the payment of benefits payable under the Award shall be administered by the employer

(c) The employer will meet the entitlements to the benefits payable under the Award

The taxpayer was awarded a TPD benefit and, pursuant to the Award, an amount was paid to the taxpayer by the employer during the relevant income year. The TPD benefit comprised of a taxable component and a tax free component.

Two legally qualified medical practitioners have certified that, as a result of the taxpayer's ill health, it is unlikely that the taxpayer can ever be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training.

The taxpayer is over their preservation age.

Relevant legislative provisions

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 82-130(1)(a)

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Section 82-140

Income Tax Assessment Act 1997 Section 82-150

Income Tax Assessment Act 1997 Subsection 307-5(1)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Summary

The TPD payment received by the taxpayer in the relevant income year is not a disability superannuation benefit as defined in subsection 995-1(1) of the ITAA 1997 because it is not a superannuation benefit as defined in section 307-5 of the ITAA 1997.

The TPD benefit is an employment termination payment as defined in section 82-130 of the ITAA 1997 and is taxed accordingly.

Detailed reasoning

Disability superannuation benefit

Subsection 995-1(1) of the ITAA 1997 defines a 'disability superannuation benefit' as follows:

disability superannuation benefit means a *superannuation benefit if …

*To find definitions of asterisked terms, see the Dictionary, starting at section 995-1

This means that in order to be a disability superannuation benefit, a payment must first be a 'superannuation benefit' as defined in subsection 995-1(1) of the ITAA 1997.

In accordance with subsection 995-1(1) of the ITAA 1997, superannuation benefit has the meaning given by section 307-5 of the ITAA 1997. The table in subsection 307-5(1) of the ITAA 1997 describes the following as payments that are superannuation benefits:

• Superannuation fund payment

• RSA payment

• Approved deposit fund payment

• Unclaimed money payment

• Superannuation co-contribution payment

• Superannuation guarantee payment

• Superannuation annuity payment

In this case, the TPD benefit received by the taxpayer in the relevant income year was paid by the employer as required by the terms of the Award. As such, the payment is not included in the table in subsection 307-5(1) of the ITAA 1997 as a payment that is a superannuation benefit.

As the TPD payment is not a superannuation benefit, it cannot be a disability superannuation benefit as defined in subsection 995-1(1)of the ITAA 1997.

Employment Termination Payment

According to subsection 82-130(1) of the ITAA 1997, a payment is an employment termination payment (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.

Payment made 'in consequence of the termination' of employment

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are 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).

While TR 2003/13 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner.

In paragraph 5 of TR 2003/13 the Commissioner states:

5. ...the Commissioner considers that 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.

In this case, the TPD payment received by the taxpayer satisfies the condition under paragraph 82-130(1)(a) of the ITAA 1997 since, in accordance with the terms of the Award, such a payment is contingent on the cessation of the taxpayer's employment. In other words, the payment would not have been made but for the termination of the taxpayer's employment.

The TPD payment was also made within 12 months of the termination of the taxpayer's employment and does not fall under any of the categories mentioned in section 82-135 of the ITAA 1997. As such, the TPD payment received by the taxpayer in the relevant income year is an ETP in accordance with subsection 82-130(1) of the ITAA 1997 and is taxed accordingly.

Tax free component of an ETP

According to section 82-140 of the ITAA 1997:

The tax free component of an employment termination payment is so much of the payment as consists of the following

(a) the *invalidity segment of the payment

(b) the *pre-July 83 segment of the payment

*To find definitions of asterisked terms, see the Dictionary, starting at section 995-1

As the taxpayer commenced employment with the employer in the 19XX-XX income year, there is no pre-July 83 segment of the payment.

According to section 82-150 of the ITAA 1997:

(1) An *employment termination payment includes and invalidity segment if:

(a) the payment was made to a person because he or she stops being *gainfully employed

(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 a capacity for which he or she is reasonably qualified because of education, experience or training.

(2) Work out the amount of the invalidity segment by applying the following formula:

Amount of employment Days to retirement
x

termination payment Employment days + Days to retirement

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.

By applying the formula to the facts of the fact, it is possible to work out the tax free invalidity segment of the TPD payment.

The remainder of the TPD payment is the taxable component to be included in the taxpayer's income tax return for the relevant income year as assessable income under section 82-10 of the ITAA 1997.

In accordance with subsection 82-10(3) of the ITAA 1997, a tax offset applies to ensure that, for those who have reached their 'preservation age' on the last day of the income year in which the payment is received, the rate of income tax on the amount does not exceed 15%.

By virtue of section 995-1 of the ITAA 1997, preservation age is defined in subregulation 6.01(2) of the Superannuation Industry (Supervision) Regulations 1994 and, for those born before 1 July 1960, means 55 years.

As the taxpayer was over their preservation age of 55 years on the last day of the relevant income year, subsections 82-10(3) and (4) of the ITAA 1997 entitle the taxpayer to a tax offset that ensures that the rate of income tax on the taxable component, up to the 'ETP cap amount' (being $185,000 for the 2014-15 income year) does not exceed 15%.

The amount of the taxable component above the ETP cap amount will be taxed at the taxpayer's marginal tax rate.