Edited version of private advice

Authorisation Number: 1052251803004

Date of advice: 17 May 2024

Ruling

Subject: Sports injury payment

Question 1

Is the payment you have been approved to receive due to suffering a sports-ending injury (the Payment) an employment termination payment (ETP) under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is any part of the Payment an invalidity segment of an ETP under section 82-150 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2024

Relevant facts and circumstances:

You were a professional sports man, playing for a club (the Club) in the XXXXX.

You had a Standard Playing Contract (the Contract) with the Club.

You suffered a sports-related concussion.

You were placed on the Inactive List by the Club.

On the advice of medical specialists, you subsequently announced your retirement.

At a later date, upon the expiration of your contract with the Club, you were delisted.

Two legally qualified medical practitioners have certified that you cannot continue your occupation in the future.

You were granted approval to receive a payment from the XXX Fund (the Fund).

Assumptions:

The payment will be made within 12 months of the termination date.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Section 82-150

Income Tax Assessment Act 1997 Section 118-20

Income Tax Assessment Act 1997 Section 118-22

Income Tax Assessment Act 1997 subparagraph 118-37(1)(a)(i)

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

Reasons for decision

Question 1:

Employment Termination Payment

Section 995-1 of the ITAA 1997 states that:

employment termination payment has the meaning given by section 82-130 of the ITAA 1997.

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

A payment is an employment termination payment 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.

In order for a payment to constitute an ETP, all the conditions in section 82-130 of the ITAA 1997 need to be satisfied.

Failure to satisfy any of the conditions will result in the payment not being considered an ETP. Furthermore, any termination payments received outside of the 12 months are taxed as ordinary income at marginal tax rates, unless the taxpayer is covered by a determination exempting them from the 12-month rule.

Payment is received in consequence of the termination of employment

While the phrase 'in consequence of the termination of employment' is not defined in the legislation, both the Courts and the Commissioner have considered the meaning of this phrase.

The Commissioner discusses the meaning of the phrase in Taxation Ruling TR 2003/13: Income tax: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13).

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

... a payment is received by a taxpayer in consequence of the termination of the taxpayer's 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 received by 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 received in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

The phrase 'in consequence of the 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 in my opinion necessary that the termination of the services should be the dominant cause of the payment.

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.

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) 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, although the termination need not be the dominant cause of the payment'.

The Full Federal Court in Dibb v Federal Commissioner of Taxation [2004] FCAFC 126; (2004) 207 ALR 151; (2004) 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.

In 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 of, 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. The termination of the payment need not be the sole or dominant cause of the payment.

Whether a payment is received in consequence of the termination of employment is determined by the relevant facts and circumstances of each case.

In your case, it is considered that the Payment, when it is made, will be received in consequence of the termination of your employment. This is because, having determined that you would no longer be able to continue playing XXX due to injury, you applied to the Fund for approval to receive the Payment, which was granted.

The rules of the Fund provide that in order for a player to be entitled to receive a payment, the injury suffered must prevent or be likely to prevent, a player from ever again playing XXX at a senior level in any competition. Furthermore, the player must have been delisted by their club.

There is therefore a direct link between the termination of your employment as an XXX sports man and the Payment being received.

But for your employment ending, you would have had no entitlement to the Payment.

There is a chain of events linking the termination of your employment to the (eventual) receipt of the Payment.

We consider that there was a causal connection between the termination of your employment and the approval of the Payment, as this followed as an effect or result of the termination of employment - if not for the termination, the approval would not have been granted and the Payment (which necessarily follows the granting of that approval) would not be made.

The termination of employment and the Payment are intertwined and connected. The Payment is considered to be received by you in consequence of the termination of your employment. Therefore, the requirement of subparagraph 82-130(1)(a)(i) of ITAA 1997 has been met.

Payment received more than 12 months after termination

Paragraph 82-130(1)(b) of the ITAA 1997 requires that the payment must be received no later than 12 months after the termination of employment.

Your employment terminated at the expiration of your contract and your delisting by the Club. While the Payment has not been made as yet, it is expected that it will be made within 12 months of that date. Therefore, for the purposes of this ruling it is accepted that the Payment will be made no later than 12 months after termination, satisfying the second condition under paragraph 82-130(1)(b) of the ITAA 1997.

Not a payment mentioned in 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, as well as the tax-free parts of a genuine redundancy payment or an early retirement scheme payment.

Under subsection 82-130(1) of the ITAA 1997, consideration must be given to whether the specific exemption for personal injury in paragraph 82-135(i) (payments that are not employment termination payments) applies. 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 a person for, or in respect of, the particular injury. This requires there to be a relationship between the injury and the payment.

In Commissioner of Taxation (Cth) v. Scully (2000) 201 CLR 148; [2000] HCA 6; (2000) 2000 ATC 4111; (2000) 43 ATR 718 (Scully), the High Court held that compensation must be calculated by reference to the nature and extent of the injury or likely loss to the taxpayer. The payment in this case was not in respect of personal injury, acting Chief Justice Gaudron and Justices McHugh, Gummow and Callinan stating in their joint decision:

However, the payment in this case cannot be said to be compensation for or in respect of the personal injury. Clauses 2.4.1 and 3.5.1, pursuant to which the respondent's payment was calculated, make no attempt to place a monetary value on a member's injury. They do not even provide a formula, roughly comparable to the manner in which a court or tribunal might assess damages in a claim for personal injury, to quantify the amount of the payment. Indeed, the very similarity of benefits for death, retirement, resignation, retrenchment and dismissal to those for total and personal disablement deny that the purpose of a payment pursuant to clauses 2.4.1 and 3.5.1 is concerned with the value of any injury sustained by an employee.

...

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.

In the Administrative Appeals Tribunal (AAT) decision AAT Case 11,722 (1997) 35 ATR 1114; (1997) 97 ATC 258, a taxpayer negotiated a settlement with their past employer by agreeing to be paid a certain amount, also to forgo all past, present and future claims against the employer, except for personal injury. Senior Member Dwyer ruled that, given the 'exception' in the settlement clause, no amount of the settlement could be for personal injury. Therefore, the ETP exclusion provisions could not apply to the amount.

There are three types of injury that a person can receive:

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

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

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

While all three types of injury may be considered personal, it is considered that only the first type (behavioural injury) falls within the meaning of the term 'personal injury'.

The reasoning above is based on the decision by the Victorian Supreme Court in Graham v. Robinson [1992] 1 VR 279 (Graham v. Robinson), where the Court had to decide if emotional hurt (ie. hurt, distress, public scandal, hatred, odium, ridicule and contempt) was a personal injury. At 281, Justice Smith stated:

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.

The decision in Graham v. Robinson was applied in the AAT decision McMahon v. Commissioner of Taxation Case [1999] AATA 5; (1999) 41 ATR 1056; (1999) 99 ATC 2025 (McMahon) in relation to a payment for alleged damage to a taxpayer's reputation. In McMahon, a critical performance appraisal of the taxpayer and other comments were published in the media. Subsequent to this, the taxpayer's 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:

The Tribunal also notes the stipulation in the concluding portion of s. 27A(1)(n) of the Act 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 taxpayer's 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 person's reputation.

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 s. 27A(1)(n) of the Act which does not operate to exclude it from the provisions of s. 27A of the Act; accordingly the reputation payment was correctly assessable as an ETP.

Applying the principles in the above cases, the payment must be for or in respect of personal injury and must be calculated both by reference to the nature and extent of the injury and the likely loss of income to the taxpayer, in order to meet the requirements of paragraph 82-135(i) of the ITAA 1997.

It is accepted that the Payment is a capital payment.

It is also accepted that the Payment is in respect of a personal injury, being a physical injury that you suffered.

However, the Payment amount has been calculated based on your age and your final year base salary under your playing contract. It has not been calculated with any reference to the nature and extent of the injury, nor with any reference to any subsequent likely loss of income.

You have specifically contended that the findings in Scully are not comparable to your circumstances, because in this case the Payment is not being made by an employer superannuation fund in discharge or satisfaction of the right to receive a payment as a result of prior contributions paid.

You have stated that your employer, being the Club, does not make contributions to the Fund, the contributions being made by the XXX itself.

You further advised that you have never been an employee of the Fund.

It is not considered that the source of the payment affects its proper characterisation under paragraph 82-135(i) of the ITAA 1997. The identity of the payer (whether the employer, or otherwise) is not a consideration in determining whether a payment is an ETP. The fact that the Payment is to be made to you by an entity other than your employer, or a superannuation fund, is irrelevant in determining the true character of the payment and whether it is consideration for personal injury.

In your case, the Payment has not been calculated with reference to the nature or extent of the injury. No attempt was made by the Fund to place a monetary value on the specific injury suffered, nor to quantify the likely loss in your income-earning ability as a result of the injury. Therefore, it cannot be a capital payment for, or in respect of, personal injury, pursuant to paragraph 82-135(i) of the ITAA 1997.

None of the other exclusions in section 82-135 of the ITAA 1997 apply to the Payment, to exclude it from being an ETP. Therefore, the third condition in paragraph 82-130(i) has been satisfied. Accordingly, as all of the conditions under subsection 82-130(1) have been satisfied, the Payment is an ETP.

Question 2:

Invalidity Segment

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

Subsection 82-150(1) of the ITAA 1997 defines the invalidity segment of an employment termination payment as follows:

(1) 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.

'Gainfully employed' is defined in subsection 995-1(1) of the ITAA 1997 as follows:

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

The Macquarie Dictionary defines 'gainful' as 'profitable; lucrative'.

In the context of the term 'gainfully employed', the adverb 'gainfully' describes the nature of the employment, being that it is a profitable pursuit, and within that term, 'gainfully' refers to the employment being for gain or reward.

The Macquarie Dictionary also defines 'employ' as 'to use the services (of a person); have or keep in one's service; keep busy or at work.' Applying this to the context in which it appears, 'employed' refers to where a person's services will be used, or kept available for use, by the employer, in one of the named pursuits, and to be 'gainfully employed', they must be employed for reward or gain.

In this case, you, as an XXX player (Player), performed services under a contract of employment. The XXXXX Agreement specifies that the Standard Player Contract (Contract) is a contract of employment between the relevant Player and the XXX Club. Players are required to perform duties under the Contract in return for specified payments. The performance of these duties in return for payment from the XXX Club is gainful employment within the meaning of the term.

The Contract is for a set term of a number of years. The Contract will terminate on the final year of its term (subject to any variation, extension or renewal). Apart from employment being terminated upon the expiration of the Contract term, employment may also be terminated by the Club if the Player's name is deleted from the XXX Club List, or by the Player or the Club, in limited circumstances, including breach of contract or misconduct.

Subject to the Contract not being terminated for one of the above reasons, a Player will remain employed under their Contract until the end of the Contract term. The Player continues to receive payments under the terms of the Contract for its duration. It is at the point when the Contract ends, and the Player ceases to be paid for their services, that they stop being gainfully employed for the purposes of subsection 82-150(1) of the ITAA 1997.

A Contract may be brought to an end before the end of the term specified in the Contract if both parties, the XXX Club and the Player, enter a Deed of Release (Deed). On the date specified in the Deed, the Player will cease to be bound by the Contract terms, they will no longer be paid for their services, and their employment will be terminated. In this particular case, there is no Deed, as you, as the Player, chose to continue to be paid by the Club until the stipulated termination date of your Contract. This is the date at which you ceased to be gainfully employed for the purposes of subsection 82-150(1) of the ITAA 1997.

It has been suggested that a Player may stop being gainfully employed at an earlier point in time, including when they are first injured, when they are placed on the Club's Inactive List, or when the second of the required medical certifications under paragraph 82-150(1)(d) of the ITAA 1997 is obtained.

In all of the above instances, the Player continues to be paid under, and continues to be bound by, the terms of the Contract. As such, the occurrence of those events does not cause a termination of the contract of employment. Player duties under the Contract, in addition to playing, include performing 'duties applicable to employees in general...' While the player may be unfit to play football, they may continue to have other duties under their contractual obligations that they are required to perform, for example media obligations or player appearances. As long as a Player remains bound by their Contract, they continue to be gainfully employed for the purposes of subsection 82-150(1) of the ITAA 1997.

It has also been suggested that gainful employment may cease when the Player's retirement is announced. A media release announcing retirement is an announcement to the public of the decision to retire. It is not a formal severing of the Contract between the Player and the Club.

Under subsection 82-150(1) of the ITAA 1997, cessation of gainful employment is relevant to determining whether there is an invalidity segment, a payment being made to a person because he or she stops being gainfully employed being the first requirement for an ETP to include an invalidity segment.

It is considered that, in this case, that requirement has been met. The Payment has been made to you because you stopped being gainfully employed.

The second requirement for an ETP to include an invalidity segment is that the person stopped being gainfully employed because they suffered from ill-health, either physical or mental.

The medical statements and letters from doctors provided by you, state the following:

§  you ceased work on the date of the incident, and will not be able to return to work

§  you have a post-concussive syndrome, and given the severity of your injuries, you are unlikely to ever be gainfully employed in any capacity for which you are reasonably qualified according to your education, experience or training

§  you were suffering from ongoing concussion issues, were unfit to train and compete in the XXX, and had retired from the XXX, due to the concussion.

You did not play another match for the Club in the XXX after the date of the injury, being placed on the Inactive List before eventually announcing your retirement, and having your contract expire at a later date.

The fourth requirement for an ETP to include an invalidity segment is that 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 capacity for which he or she is reasonably qualified because of education, experience or training.

The previously-referred to medical statements and letters have been provided by a treating general practitioner and sports medicine doctor, a sports and exercise medicine specialist, and a neurologist. All are considered to be legally qualified medical practitioners.

As such, the above requirement has been met.

The remaining requirement to be met is contained in paragraph 82-150(1)(c) of the ITAA 1997, which requires that the gainful employment stopped before the person's last retirement day.

The formula in subsection 82-150(2) of the ITAA 1997 determines the amount of any invalidity segment, as follows:

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

Amount of *employment termination payment × 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.

In identifying the portion of the ETP that will be tax-free, the 'days to retirement' in the formula starts on 'the day on which the person's employment was terminated'. The formula notably does not use the term 'gainful employment'. The word 'terminated' is defined in the Macquarie Dictionary as meaning to 'bring to an end'. In the context of employment, to terminate employment means to bring the contract of employment to an end.

Based on the view above, that the date the gainful employment stopped for the purposes of subsection 82-150(1) of the ITAA 1997 is when the Contract ended, it would align with the date the employment was terminated for the purposes of subsection 82-150(2).

It would make little sense for the time of ceasing gainful employment and termination of the employment to be different, and even if it was found that gainful employment stopped at an earlier time, it would have no impact on determining the invalidity portion of the ETP, as the formula would still use the contract termination date.

Further, section 82-150 of the ITAA 1997 provides concessional treatment for payments made because a person will be unlikely to be able to earn income in a field for which they are qualified in the future.

The formula in subsection 82-150(2) of the ITAA 1997 is intended to proportionally reflect the period that the person will not be able to earn income until their last retirement day.

It would be at odds with its purpose to include in that portion a period where the person, who has become injured or ill while employed, was still employed under a contract and earning income from that employment.

The gainful employment for the purposes of subsection 82-150(1) of the ITAA 1997 stops on the date the Contract of employment ends.

Therefore, in this case, the termination date and the last retirement day are the same date.

As such, the Payment to be made to you will not contain an invalidity segment.

Other Relevant Comments

Compensation paid for the loss of a capital asset or amount is regarded as a capital receipt. However, a capital gain you make from a capital gains tax (CGT) event is disregarded if it is compensation or damages for any wrong or injury you suffer in your occupation, pursuant to subparagraph 118-37(1)(a)(i) of the ITAA 1997.

Section 118-20 of the ITAA 1997 also recognises that a capital gain you make from a CGT event is reduced if, because of the event, a provision of the ITAA 1997 includes an amount in your assessable income for any income year.

Section 118-22 of the ITAA 1997 treats an ETP that you receive as being included in your assessable income. As such, any capital gain you made will be reduced to zero.

As any capital gain you made will be reduced to zero, under the anti-overlap provisions, it is not necessary to consider the exemption in section 118-37 of the ITAA 1997.