Private ruling: Employment termination payment
Date of advice: 11 January 2021
Published: March 2021
Ruling period: Financial year ended 30 June 20XX
Date scheme commenced: 1 July 20XX


Relevant facts and circumstances: You were employed from 20 June 20XX until your employment was terminated on 14 August 20XX. You were employed under an enterprise bargaining agreement. In February 20XX you were diagnosed with an illness. As a result of your diagnosis, you were unable to obtain a certificate of medical fitness which you are required to hold in order to continue your employment with your employer. On 16 July 20XX a medical practitioner provided certification that you are no longer able to maintain your position due to your illness and that your incapacity will be permanent. As you could not maintain your fitness to obtain a medical clearance, your employment was terminated on 14 August 20XX. In September 20XX another medical practitioner provided a second certification that you are not medically fit to work due to your illness. Under your EBA you are entitled to a compensation payment on termination of your employment if it is terminated as a result of you failing to obtain medical clearance. You were paid one year's salary as compensation payment on termination of your employment in August 20XX after you failed to obtain a certificate of medical fitness due to your illness.

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 82-150 | Income Tax Assessment Act 1997 Section 82-4

Reasons for decision: Summary: The compensation payment is an ETP. The ETP is comprised of a tax-free and taxable component. | Detailed Reasoning - Detailed reasoning: An ETP under section 82-130 of the ITAA 1997 is a payment received by you: • -in consequence of termination of your employment; • -it is received no later than 12 months after that termination; and • -it is not a payment mentioned in section 82-135 of the ITAA 1997. In your case, your compensation payment was made in connection with the termination of your employment on 14 August 20XX under a clause in your EBA. The payment was made in August 20XX, 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 made to you in August 20XX 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 which consists of both tax free and taxable components. Section 82-140 of the ITAA 1997 states the tax-free component consists of the invalidity segment and pre-July 83 segment 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 states: | Detailed Reasoning - '82-150(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. | Detailed Reasoning - 82-150(2): 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 your case the ETP was made under paragraph (b) of section 82-150 of ITAA 1997 as you stopped being gainfully employed because you suffered ill health and your gainful employment occurred before your last retirement day under paragraph (c). The requirements of paragraph (d) of section 82-150 had been met as 2 legally qualified medical practitioners have certified that because of your ill health, it is unlikely that you can ever be gainfully employed in the capacity for which you are reasonably qualified. You have provided copies of two medical certification with your application which meets these requirements. Therefore, in your case the calculation of the invalidity segment of your ETP will be determined in accordance with the formula in section 82-150 of the ITAA 1997. The taxable component as specified under section 82-145 of the ITAA 1997 is the ETP less the tax-free component. The tax payable on the taxable component is calculated under sub-sections 82-10(3) and 82-10(4) of the ITAA 1997. Sub-section 82-10(3) provides that, up to the limit specified in 82-10(4) the tax rate is not to exceed 30%. In your case, the maximum 30% tax rate applies as you have not yet reached your preservation age. Sub-section 82-10(6) of the ITAA 1997 prescribes that the $180,000 cap under 82-10(4)(c) does not apply as it has been determined that your ETP does include an invalidity component. Therefore, the relevant cap is the ETP cap, being $XXX in the 20XX-XX financial year less any amounts specified in paragraphs 82-10(4) (a) and 82-4(b) of the ITAA 1997.