Private ruling: Invalidity segment - partial and permanent disability benefit
Published: July 2012
Ruling period: 200Yincome year.
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is any part of the partial and permanent disability benefit payment received by your client an invalidity segment of the tax free component? | A1: No.

Relevant facts and circumstances: Your client is under age 55. Your client had been previously employed with an employer since the mid-1980s, before working for Employer A. In the late 1980s your client commenced working for Employer A. Your client was a member of a superannuation scheme. Your client commenced employment with Employer A at a particular level. On separation from Employer A, your client was employed at a higher level. Late in the X income year your client suffered an injury which resulted in your client being medically discharged from Employer A in the Y income year. A statutory health corporation provided an amended final assessment report on your client in the Y income year. During the course of employment, your client suffered an injury on several occasions. As a result, your client has not returned to work since the last injury. A medical panel concluded that your client is unfit for work with Employer A in a particular capacity for the foreseeable future due to the injury suffered by your client. However, your client may be considered fit for some alternate duties. Further, the report states that your client is permanently unfit due to the injury. However, the report also indicates that your client has not been found to suffer from a permanent disablement, as defined under an award. Further, the report states that no apparent reason has been demonstrated as to why your client would not be able to engage in some kind of meaningful employment in the wider workplace. In a Work Cover Certificate dated in the second quarter of the specific income year, Dr A stated that your client was very unlikely to return to any duties with Employer A on psychological grounds as well as physical grounds. Dr A recommended that your client work outside the employer and that it was imperative for your client's psychological health that your client be allowed to do so as soon as such opportunities may arise. A letter from Employer A dated in the third quarter of the Y income year advised your client that their application for a partial and permanent disability benefit was approved after considering your client's case history together with a recommendation by the medical panel. Subsequently a gross payment had been approved as a partial and permanent disability benefit. Further, the letter advised that this payment was calculated in accordance with an award. An employment termination payment amount less tax withheld was received by your client in the Y income year. There were no pre-existing employer or award arrangements that would have terminated your client's employment prior to their 65th birthday. Since ceasing employment with Employer A, your client has become employed with Company B. Your client provides certain services to the clients of Company B. In providing these services your client utilises qualifications which were obtained whilst in employment with Employer A. Your client holds various qualifications which were obtained during your client's employment with Employer A. These qualifications are used in your client's new employment with Company B. You have provided copies of a number of medical certificates from Dr A. In the first, dated in the second quarter of the Y income year, Dr A states that your client will be highly unlikely to be fit for employment with Employer A in the long term. Dr A goes on to state, however, that your client is fit to work elsewhere in a part-time fashion and should be allowed to seek these opportunities as soon as possible. In the second, dated in the last quarter of the specific income year, Dr A refers to the previous medical certificate and states that, to clarify the wording in that earlier medical certificate, as a result of your client's initial injuries your client is unable to be gainfully employed in a capacity for which your client is reasonably qualified because of education, experience or training. Dr A further states that in making this certification, your client's current employment for which Dr A believes your client is fit has been taken into account. Dr A then restricts this certification to include only your client's capacity or otherwise to perform duties for Employer A or other duties for which your client is qualified by education, training and experience. You have provided two medical certificates from Dr B. In the first, dated in the last quarter of the specific income year, Dr B states that after examining your client and reviewing your client's medical certificates over the last several years, notes from that period and taken a history of your client's medical and psychological problems, that your client is unlikely to be gainfully employed in a capacity for which your client is reasonably qualified because of education, experience and training with Employer A. Dr B further states that your client is fit to undertake other duties outside the employment with Employer A. In the second, dated almost two weeks later, Dr B restates what is stated in the earlier medical certificates and then restricts the certification to include only your client's capacity or otherwise to perform your client's duties with Employer A or other duties for which your client is qualified by education, training and experience.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 1-3. | Income Tax Assessment Act 1997 Subsection 82-10(1). | Income Tax Assessment Act 1997 Subsection 82-10(2). | Income Tax Assessment Act 1997 Subsection 82-130. | Income Tax Assessment Act 1997 Subsection 82-130(1). | Income Tax Assessment Act 1997 Paragraph 82-130(1)(a). | Income Tax Assessment Act 1997 Paragraph 82-130(1)(b). | Income Tax Assessment Act 1997 Paragraph 82-130(1)(c). | Income Tax Assessment Act 1997 Section 82-135. | Income Tax Assessment Act 1997 Paragraph 82-135(i). | Income Tax Assessment Act 1997 Section 82-140 . | Income Tax Assessment Act 1997 Section 82-145. | Income Tax Assessment Act 1997 Subsection 82-150(1). | Income Tax Assessment Act 1997 Paragraph 82-150(1)(a ). | Income Tax Assessment Act 1997 Paragraph 82-150(1)(b). | Income Tax Assessment Act 1997 Paragraph 82-150(1)(c). | Income Tax Assessment Act 1997 Paragraph 82-150(1)(d). | Income Tax Assessment Act 1997 Subsection 82-150(2). | Income Tax Assessment Act 1997 Section 995-1. | Income Tax Assessment Act 1936 Subsection 27A(1). | Income Tax Assessment Act 1936 Section 27G.

Reasons for decision: Summary: The employment termination payment received by your client from his previous employer does not include an invalidity segment. | Detailed Reasoning - Detailed reasoning: Where a person's employment is terminated because of ill-health and the person receives an employment termination payment, part of the payment may be tax free. This component is called an invalidity segment. Therefore, prior to determining if the payment includes an invalidity segment, the payment must be an employment termination payment. | Detailed Reasoning - Employment termination payment: Employment termination payments are defined in section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997). Subsection 82-130(1) 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 termination; 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. 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; · reasonable capital payments for personal injury. Therefore, it can be seen that 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 more than 12 months after the termination of employment will be taxed as ordinary income at marginal tax rates. | Detailed Reasoning - Payment received in consequence of the termination of employment: The first condition to be met is that there must be a payment that is made in consequence of the termination of employment of the taxpayer. It is considered that the payment received by your client from his former employer, was made in consequence of the termination of their employment. Your client was unable to continue work due to their medical condition and consequently was medically discharged from his former employer. Retirement on medical grounds was recommended by a medical panel to your client's former employer who approved your client's termination of employment and the payment of a partial and permanent disability benefit under an award. The payment received by your client from his former employer would not have been approved and paid unless your client's employment was terminated and in this case the termination was based on medical grounds. Therefore, the condition under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied. | Detailed Reasoning - Payment is received no later than 12 months after termination of employment: The second condition for the payment to meet the criteria is that the employment termination payment was paid to the taxpayer no later than 12 months after your client's employment was terminated. The facts of this case show that your client received the payment within 12 months of the termination and therefore satisfies the requirements of paragraph 82-130(1)(b) of the ITAA 1997. | Detailed Reasoning - Not a payment mentioned in section 82-135 of the ITAA 1997: As noted earlier section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments. These include: · superannuation benefits; · 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; · reasonable capital payments for personal injury. The payment is the result of a calculation of a partial and permanent disability benefit under an award. It is not a superannuation benefit, a payment for unused annual leave or unused long service leave, nor is it the tax-free part of a genuine redundancy payment or an early retirement scheme payment. However, consideration must be given as to whether the payment represents a reasonable capital payment for personal injury. If it does, then the payment will not be an employment termination payment under paragraph 82-135(i) of the ITAA 1997 (payments that are not employment termination payments). Paragraph 82-135(i) of the ITAA 1997 states that an employment termination payment does not include: 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 ); Payments that fall within this exclusion are payments or benefits that compensate or reimburse the person for or in respect of the particular injury. Prior to 1 July 1997, former paragraph (n) of the definition of an eligible termination payment in former subsection 27A(1) of the Income Tax Assessment Act 1936 (the former paragraph (n) exclusion) applied to exclude similar payments from being eligible termination payments. The former paragraph (n) exclusion stated: Consideration of a capital nature for, or in respect of, personal injury to the taxpayer, to the extent to which the amount or value of the consideration is, in the opinion of the Commissioner, reasonable having regard to the nature of the personal injury and its likely effect on the capacity of the taxpayer to derive income from personal exertion. From 1 July 2007, the former paragraph (n) exclusion has been replaced by paragraph 82-135(i) of the ITAA 1997. However, the Explanatory Memorandum (EM) to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 which, as enacted, inserted section 82-135 of the ITAA 1997, states that: consistent with current legislation, certain payments are prevented from qualifying as employment termination payments. Paragraph 82-135(i) of the ITAA 1997 represents a rewrite of the former paragraph (n) exclusion. Despite the fact that the wording of the legislation has changed from 'consideration of a capital nature' to 'capital payment', the meaning of the legislation has not changed. In this regard, section 1-3 of the ITAA 1997 states: (1) This Act contains provisions of the Income Tax Assessment Act 1936 in a rewritten form. (2) If: (a) that Act expressed an idea in a particular form of words; and (b) this Act appears to have expressed the same idea in a different form of words in order to use a clearer or simpler style; the ideas are not to be taken to be different just because different forms of words were used. In light of this, court decisions dealing with the operation of the former paragraph (n) exclusion can be cited with authority in respect of the operation of paragraph 82-135(i) of the ITAA 1997. In Commissioner of Taxation v. Scully [2000] HCA 6; (2000) 2000 ATC 4111; (2000) 169 ALR 459; (2000) 43 ATR 718; (2000) 74 ALJR 504; (2000) 201 CLR 148 (Scully) the Full Bench of the High Court considered whether a payment made by a superannuation fund as a result of the taxpayer's termination of employment because of invalidity was: · 'consideration'; and · consideration 'for, or in respect of, personal injury'. It was held that the payment was 'consideration' within the broad sense of that term. However, the payment was not 'consideration for or in respect of personal injury to the taxpayer' which would fall within the paragraph (n) exclusion. The clauses of the trust deed which calculated the payment made no attempt to place a monetary value on the taxpayer's injury, nor was it the purpose of superannuation schemes to compensate for personal injury. Acting Chief Justice Gaudron and Justices McHugh, Gummow and Callinan stated in their joint decision: 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. From the foregoing it is apparent that for an amount to be a capital payment for, or in respect of, personal injury, the payment must actually be for personal injury and be calculated by reference to the nature and extent of the injury or likely loss to the taxpayer. As advised in a letter from Employer A, the payment was calculated in accordance with an award. Payments under the award are made where a employee has suffered a partial and permanent disability (PPD) as a result of an employment injury and their employment is subsequently terminated. The award determines the amount to be paid as a lump sum under the award. The amount is calculated by reference to the age and salary of the employee at the time of the injury. Consequently, the level of incapacity is irrelevant as to the amount received under the award. The lump sum payments are consideration for, or in respect of the employee's termination of employment and the employee's rights under the award and not consideration for, or in respect of the employee's injury. The lump sum payment is not calculated by reference to the nature and extent of the injury or likely loss to the employee. In other words, the payment is to compensate the employee for the loss of their employment as a result of the injury sustained rather than to compensate for the injury itself and any subsequent loss of earning capacity. Accordingly, it is considered that paragraph 82-135(i) of the ITAA 1997 does not apply to the lump sum payment being made under the award. Therefore your client's payment is not of a type paragraph 82-130(1)(c) of the ITAA 1997 would exclude. As all the conditions under subsection 82-130(1) of the ITAA 1997 have been met, the payment will be an employment termination payment. | 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. 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. Prior to your client's injury, your client was employed on a full-time basis as a employee with your client's former employer. In the Y income year your client's employment with the employer was terminated after a medical panel considered your client was unfit for the substantive requirements of their position due to your client's injury and recommended their medical discharge. Under normal conditions of employment your client would have retired at age 65. Your client was under age 55 at the time of the termination of employment. Therefore the conditions in paragraphs 82-150(1)(a), (b) and (c) of the ITAA 1997 have 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. As noted above, paragraph 82-150(1)(d) of the ITAA 1997 requires that two legally qualified medical practitioners certify 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. Prior to 1 July 1994, it had only been necessary for the termination of employment to occur because the taxpayer was physically or mentally incapacitated and therefore unable to engage in that employment. It did not require there be incapacity to engage in any employment. However, amendments made to the section that applied prior to 1 July 2007, section 27G of the ITAA 1936, by the Taxation Laws Amendment (Superannuation) Act 1992 require the incapacity to prevent the taxpayer ever being able to undertake any employment for which the taxpayer is reasonably qualified. The EM to the Taxation Laws Amendment (Superannuation) Bill 1992 confirms this. In explaining the test for invalidity, the EM stated the following: To clarify the test for incapacity and to place the onus of determining invalidity on legally qualified medical practitioners, from 1 July 1994 the incapacity of the person will have to be certified by two medical practitioners. …the invalidity payment concession is extended only to people who are unable to undertake any form of employment for which they are reasonably qualified. A person who is unable to continue his or her current employment, but is able to undertake other appropriate employment, will not have access to the concession. Therefore, a person who is unable to continue to perform the duties of his or her current employment, but is able to undertake other appropriate employment for which they are reasonably qualified, would now not satisfy the condition in paragraph 82-150(1)(d) of the ITAA 1997, which is the rewritten provision for section 27G of the ITAA 1936. The EM does not elaborate further. However, the use of the term 'appropriate employment' in the EM suggested the intention that the term 'reasonably qualified' be interpreted as meaning neither over nor under qualified to any significant extent. It is clear from reading the provision that the onus for determining invalidity (ill-health) is ascribed to the two legally qualified medical practitioners. Fulfilling that responsibility would involve, not only a medical opinion as to the taxpayer's physical and mental capabilities but also consideration as to what constitutes appropriate employment, based upon the taxpayer's education, training and experience. Even if a taxpayer's employment is terminated by reason of disability, this does not mean that the second part of test for invalidity is satisfied. The two parts are independent. The fact that the medical practitioners have to determine invalidity does not mean that the medical practitioners have to determine the reason for termination. A person's employment can be terminated because of disability, irrespective of whether two medical practitioners form an opinion as to whether the disability will prevent the taxpayer from ever being able to be employed in a capacity for which the taxpayer is reasonably qualified because of education, training or experience. Further, the requirement that the disability is likely to result in the taxpayer being unable ever to be employed in a capacity for which he or she is reasonably qualified extends to full-time employment, part-time or casual employment. A person who is not able to work full-time but can work part-time or casual in any employment for which the taxpayer is reasonably qualified will not receive the concessional component. In your client's case, a legally qualified medical practitioner, Dr A, certified in the second quarter of the Y income year that your client is highly unlikely to be fit for employment with Employer A in the long term. Dr A goes on to state, however, that your client is fit to work elsewhere in a part-time fashion and should be allowed to seek these opportunities as soon as possible. This certificate was inconclusive as to whether your client could use their education, training and experience gained during employment with Employer A for future employment. In the last quarter of the specific income year, another medical certificate from Dr A was obtained. Dr A refers to the previous medical certificate and states that, to clarify the wording in that earlier medical certificate, as a result of your client's initial injuries your client is unable to be gainfully employed in a capacity for which your client is reasonably qualified because of education, experience or training. However, this statement was restricted to include only your client's capacity or otherwise to perform duties for Employer A or other duties for which your client is qualified by education, training and experience. Therefore, this medical certificate was inconclusive as to whether your client was able to utilise their education, training and experience, gained from employment with Employer A, at your client's new employment with Company B. In the last quarter of the specific income year, Dr B provided a medical certificate in regards to your client. The doctor was not the treating doctor during the period of your client's injury and relied on medical certificates over the last several years and the current condition of your client. The doctor states that your client is unlikely to be gainfully employed in a capacity for which your client is reasonably qualified because of education, experience and training with Employer A. Dr B further states that your client is fit to undertake other duties outside the employment with Employer A. This medical certificate is inconclusive as to whether your client was able to utilise their education, training and experience, gained from employment with Employer A, at your client's new employment with Company B. Less than two weeks later, Dr B provided a second medical certificate in regards to your client. In this revised certificate Dr Brand restates what is stated in the earlier medical certificates and then restricts the certification to include only your client's capacity or otherwise to perform your client's duties with Employer A or other duties for which your client is qualified by education, training and experience. The medical certificate appears to be contradictory as it states on one hand, your client is unlikely to use their education, experience, or training in another form of employment, yet it restricts employment to only your client's capacity to perform duties with Employer A. Therefore, this medical certificate is inconclusive as to whether your client was able to utilise their education, training and experience, gained from the employment with Employer A, at your client's new employment with Company B. From the facts provided, since ceasing employment with Employer A, your client has become a senior employee of Company B. Your client provides certain services to the clients of Company B. In providing these services, your client utilises qualifications which were obtained whilst in employment with Employer A. As stated earlier, an invalidity payment concession is extended only to people who are unable to undertake any form of employment for which they are reasonably qualified. A person who is unable to continue to perform the duties of their current employment, but is able to undertake other appropriate employment for which they are reasonably qualified, would not satisfy the condition under paragraph 82-150(1)(d) of the ITAA 1997. Accordingly, in light of the foregoing, it is considered your client does not satisfy the condition under paragraph 82-150(1)(d) of the ITAA 1997. As such, no part of the partial and permanent disability benefit payment received by your client is an invalidity segment of the tax free component.

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