Edited version of private advice

Authorisation Number: 1051873221581

Date of advice: 30 July 2021

Ruling

Subject: Employment termination payment

This ruling applies for the following period:

Financial year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were employed as a firefighter for a specified period.

You were employed under an Award (the Award).

Subclause of the Award states that the employment of a firefighter who is determined as suffering partial and permanent incapacity will be terminated in accordance with another specified Clause, or otherwise upon such firefighter's consent or request.

The Award advises on when and how Partial and Permanent Incapacity Benefits are being paid under this Award.

On specified dates two legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that you can ever be gainfully employed in capacity for which you are reasonably qualified because of education, experience or training.

On specified date you were advised by your employer that after their careful consideration they have decided to wholly accept the doctors' reports and if you do not dispute these reports to consider you for a medical discharge.

On specified date, you signed a 'Partial and Permanent Incapacity Benefit Claim Form declaration. By signing this form, you accepted a Partial and Permanent Incapacity employment termination payment benefit which finalised your entitlements under the Award.

Your employment with the employer was terminated sometimes in the 20XX year.

You were then paid an employment termination payment that was calculated in accordance with the Award.

This payment was made to you within XX months of your termination.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-10

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 118-20

Income Tax Assessment Act 1997 Section 118-22

Detailed reasoning

An ETP under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997) is a payment received by you:

(a) in consequence of termination of your employment;

(b) it is received no later than 12 months after that termination; and

(c) it is not a payment mentioned in section 82-135 of the ITAA 1997.

You contend that the payment should be treated as a capital payment that is exempt from capital gains tax. However, anti-overlap provisions in sections 118-20 and 118-22 of the ITAA 1997 state that a payment that meets the definition of an ETP is to be assessable as an ETP instead of being treated as a capital payment.

In your case, your payment was made in connection with the termination of your employment and in accordance with your Award. The payment was made within 12 months of termination of your employment. The payment was not any of those mentioned under section 82-135 of the ITAA 1997. Therefore, the payment that was made to you is an ETP.

The ETP is a life benefit termination payment as defined under sub-section 82-130(2) of the ITAA 1997

Section 82-10 of the ITAA 1997 sets out how life benefit termination payments are to be taxed.

Paragraph 82-10(6)(c) of the ITAA 1997 then states that taxable component in relation to life benefit termination payments does not include invalidity segments, included in such payments.

Section 82-140 of the ITAA 1997 states that the tax free component consists of the invalidity segment and pre-July 83 segment of the payment.

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

In your case, the tax-free component does not include a pre-July 83 segment as your employment period did not include any period relating to period prior to July 1983.

For the invalidity segment to apply, section 82-150 of the ITAA 1997 need to be satisfied.

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.

Subsection 82-150(2) of the ITAA 1997 then provides the following formula on how to work out the invalidity segment:

Amount of employment termination payment x Days to retirement /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.

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

Accordingly, the invalidity segment of your ETP had been calculated in accordance with formula under subsection 82-150(2) of the ITAA 1997.

Your taxable component had been calculated in accordance with section 82-145 of the ITAA 1997.