Private ruling: Invalidity segment
Published: January 2012
Ruling period: Year ended 30 June 2011.
Date scheme commenced: 1 July 2010.

Ruling: Q1: Is any part of the termination payment received by your client a tax free invalidity segment pursuant to section 82-150 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: Your client is over 40 years old. Your client was employed with an entity (Entity 1) from 1988. Your client's employment was terminated in the 2010-11 income year as he was medically unfit for work following post traumatic stress. Your client received an on-duty partial and permanent disability benefit payment from Entity 1. The entire amount of the above payment has been treated as taxable. You have included reports from 3 independent medical practitioners. The report written by a medical practitioner (MP 1) includes details of the incident that lead to your client's employment being terminated and an impairment assessment. The following has been taken from the report written by a medical practitioner (MP 2). Your client completed a four year apprenticeship to be a qualified in a different industry and worked in this field for three years prior to joining Entity 1. As a result of an event that occurred during the 2006-07 income year, your client has developed psychiatric disorders which prevent him from being fit for employment within Entity 1. It is believed your client will have the capacity for work in a different organisation. It is believed your client does not have a total and permanent disablement and that he will be able to engage in some meaningful work at some stage in the future. In the medical statement completed by a medical practitioner (MP 3) it states your client will be fit to perform alternative duties in the future. Your client commenced attending TAFE in the 2010-11 income year to up skill in the field he was in prior to joining Entity 1. Your client commenced part time employment with an entity (Entity 2) during the 2010-11 income year. During the 2011-12 income year, your client commenced full time employment with Entity 2.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1997 Section 82-135 | Income Tax Assessment Act 1997 Subsection 82-150(1) | Income Tax Assessment Act 1997 Subsection 82-130(1)

Reasons for decision: Summary: Your client's on-duty partial and permanent disability benefit is an Employment Termination Payment (ETP). The ETP does not contain an invalidity segment as not all of the conditions have been met. | Detailed Reasoning - Employment termination payment: Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that: employment termination payment has the meaning given by section 82-130. Subsection 82-130(1) of the ITAA 1997 declares: 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 the termination (but see subsection (4)); and (c) it is not a payment mentioned in section 82-135 (discussed below) The above three conditions need to be satisfied in order for the payment to be treated as an employment termination payment. Failure to satisfy any of the three conditions will result in the payment not being considered an employment termination payment. Any termination payments received outside of the 12 months will be taxed as ordinary income at marginal tax rates. According to the facts your client received an on-duty partial and permanent disability benefit payment from Entity 1 resulting from a medical discharge. As such, the payment was made in consequence of the termination of your client's employment and therefore paragraph 82-130(1)(a) is satisfied. The payment was received within 12 months of the employment being terminated and therefore paragraph 82-130(1)(b) is satisfied. | Detailed Reasoning - Employment termination payment exclusions: Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including: · payment for unused annual leave or unused long service leave; · the tax-free part of a genuine redundancy payment or an early retirement scheme payment; and · reasonable capital payments for personal injury. As such, this provision excludes payments or benefits that compensate or reimburses the taxpayer for or in respect of the particular injury. According to the facts, the payment was not for compensation or reimbursement to your client for, or in respect of, personal injury and as such the exclusion under paragraph 82-135(i) of the ITAA 1997 does not apply and paragraph 82-130(1)(c) is satisfied. | Detailed Reasoning - 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. | Detailed Reasoning - 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. Until your client's employment was terminated he was employed on a full-time basis with Entity 1. | Detailed Reasoning - Payment for stopping gainful employment: As discussed above the 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. | Detailed Reasoning - 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 taxpayers ill health. That is, the ill health was the immediate cause for the termination of the taxpayers employment. In this case, the facts show the termination of employment occurred after the employer considered your client's application for a benefit under the Death and Disability Scheme. Therefore, it is considered that this requirement is satisfied. | Detailed Reasoning - The termination of employment of the taxpayer occurred before the last retirement date in relation to the employment.: This condition requires the date of termination be before the taxpayer's last retirement date. Your client's employment was terminated when your client was well before the retirement age of 65. Therefore, the condition of 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 at the time of termination 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 that 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. The facts state your client was previously trained in an industry and worked full time in this industry prior to his employment with Entity 1. Further, since his employment with Entity 1 was terminated he has attended a TAFE course to up skill in this industry and is currently working full time in this industry with Entity 2. As such, your client is reasonably qualified in this industry. According to the facts both reports from MP 2 and MP 3 have indicated your client has the capacity to work in a different organisation and will be fit to perform alternative duties in the future. Further, MP 2 has stated he believes your client does not have a total and permanent disablement and that he will be able to engage in some meaningful work at some stage in the future. Based on the above your client can be, and currently is, gainfully employed in the capacity for which he is reasonably qualified. As such, paragraph 82-150(1)(d) of the ITAA 1997 has not been satisfied. | Detailed Reasoning - Conclusion:: As not all of the conditions for deductibility under section 82-150 of the ITAA 1997 have been satisfied, no element of the employment termination payment received from Entity 1 will be an invalidity segment.

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