Private ruling: Employment termination payment - invalidity segment
Published: August 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the lump sum representing the commutation of regular periodic payments an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Does any part of the lump sum represent an invalidity segment under section 82-150 of the ITAA 1997? | A2: No.

Relevant facts and circumstances: Your client was employed with an employer (the Employer) until your client's employment was terminated in the 2009-10 income year. During the time of employment with the Employer your client sustained some injuries. From the date of your client's termination of employment your client was in receipt of regular periodic payments paid under an Act of parliament (the Act). Details in relation to the Act have been supplied and they show that the Employer is liable to pay regular periodic payments to its employees who are incapacitated due to injury. A publication has also been supplied which details how the regular periodic payments paid and that they are taxable as income related payments. In the 2011-12 income year your client received letters from the relevant paying authority in relation the your entitlement to the periodic payments at various time periods. During the 2011-12 income year your client's superannuation benefits were released to your client on medical grounds. Details of medical certificates made in relation to your client by two legally qualified medical practitioners have been provided. In the 2011-12 income the relevant paying authority advised your client of the lump sum payment under a section of the Act in response to your client's request to have the regular periodic payments commuted to a lump sum payment. During the 2011-12 income year the client received the lump sum payment. Your client received a PAYG payment summary (the summary) from the Employer for the 2011-12 income year which shows a gross payment from which tax was withheld. Your client is less than 55 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 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 Subsection 82-130(4). | Income Tax Assessment Act 1997 Subsection 82-130(5). | Income Tax Assessment Act 1997 Subsection 82-130(7). | Income Tax Assessment Act 1997 Section 82-135. | Income Tax Assessment Act 1997 Subsection 82-10. | Income Tax Assessment Act 1997 Section 82-150. | Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision: Summary: The lump sum payment your client received as a result of the commutation of weekly payments is not an employment termination payment as it was not made within 12 months of your client's termination of employment. Accordingly, as the lump sum payment is not an employment termination payment the issue of whether any part of the payment includes an invalidity segment is not relevant. | Detailed Reasoning - Employment termination payment: It is noted that the circumstances relating to the commutation of your client's regular periodic payments to a lump sum are similar to those in FC of T v Pitcher [2005] FCA 1154; (2005) ATC 4813; (2005) 60 ATR 424. In Pitcher's Case , Ryan J held that the commutation of weekly payments to a lump sum, which were made pursuant to section 30 of the Safety, Rehabilitation and Compensation Act 1988 (SRCA), was an ETP. Unlike Pitcher's Case , which considered whether a lump sum payment was an eligible termination payment within the meaning of section 27A of the Income Tax Assessment Act 1936 (ITAA 1936), it must be determined in your client's case whether the lump sum payment your client received is an 'employment termination payment' (as from 1 July 2007, the taxation treatment of payments made in consequence of the termination of any employment of the taxpayer, formerly known as eligible termination payments (ETPs), changed). 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 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. To determine if the lump sum (the payment) paid to your client constitutes an employment termination payment, all the conditions in section 82-130 of the ITAA 1997 will need to be satisfied. Failure to satisfy any of the conditions will result in the payment not being considered an employment termination payment. 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. | Detailed Reasoning - Paid as a consequence of the termination of employment: It should be noted that the phrase in consequence of the termination of your employment is not defined in the legislation. However, both the Courts and the Commissioner have considered the meaning of this phrase. In Taxation Ruling TR 2003/13 (TR 2003/13) the Commissioner has considered the meaning of the phrase in consequence of. In paragraph 5 of TR 2003/13 the Commissioner states: a payment is made in respect of a taxpayer in consequence of the termination of the 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 made to 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 made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case. In your client's case, your client's employment with the Employer was terminated in the 2009-10 income year due to medical injuries sustained by your client during the course of employment. Subsequently your client commenced to receive regular periodic payments under an Act of parliament (the Act). Under the Act, as the facts show, compensation is payable to an employee who is incapacitated for work as a result of an injury. Further, these compensation payments are made to the employee for each week after the date of retirement during which the employee is incapacitated. In view of the above it is clear that the regular periodic payments made to your client, notwithstanding that they are of an income nature, were in consequence of a termination of employment. In relation to the lump sum payment your client received in the 2011-12 income year, which was made in accordance with a section of the Act and represents the redemption of the regular incapacity payments to a lump sum, it is considered that there is a nexus between that payment and the termination of your client's employment. The payments were the result of a sequence of events that followed the termination of your client's employment and they were connected with the lump sum paid by way of redemption. The redemption by a lump sum of future entitlements was the final payment made to your client in consequence of the termination of his employment. It follows, therefore, that the amount of the lump sum payment was made in consequence of the termination of your client's employment. Consequently , the first requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied. | Detailed Reasoning - The payment is received no later than 12 months after termination: The second condition for the payment to be an employment termination payment under paragraph 82-130(1)(b) of the ITAA 1997 is that the employment termination payment is paid to the taxpayer no later than 12 months after the taxpayer's employment was terminated. However, in certain circumstances, where the payment is made outside 12 months there is an exemption from the 12 month rule under subsection 82-130(4) of the ITAA 1997. As your client received the payment approximately more than 12 months after your client's employment was terminated the issue of whether an exemption from the 12 month rule applies in your client's case is to be considered under the relevant provision in subsection 82-130(4) of the ITAA 1997 which states: Paragraph (1)(b) [which relates to the 12 month rule] does not apply to you if: (a) you are covered by a determination under subsection (5) or (7); or …. In your client's case, from the facts provided, there is nothing to indicate that either subsections 82-130(5) or (7) of the ITAA 1997 would apply. In view of the above paragraph 82-130(1)(b) of the ITAA 1997 has not been satisfied as the lump sum payment was made more than 12 months after your client's termination of employment nor are the exemptions from the 12 month rule under subsection 82-130(4) of the ITAA 1997 satisfied. | Detailed Reasoning - Conclusion: As one of conditions for the payment to be treated as an employment termination payment has not been satisfied it is not necessary to determine whether the condition in paragraph 82-130(1)(b) of the ITAA 1997 has been satisfied. Further, it should be noted as the lump sum payment is not an employment termination that no part of the payment includes an invalidity segment as section 82-150 of the ITAA 1997 shows that an invalidity segment only relates to an employment termination payment. Accordingly, the lump sum payment is taxed as ordinary income at marginal tax rates.