Private ruling: an invalidity payment
Published: January 2012
Ruling period: Year ended 30 June 2007
Date scheme commenced: 1 July 2006

Ruling: Q1: Is any part of your eligible termination payment a tax-free invalidity payment? | A1: No.

Relevant facts and circumstances: You are under age 50. You were employed by a state public service from 19XX to late 19XX. You then commenced employment with Entity 1 in 19XX until 20XX when Entity 1 went into bankruptcy. You rolled over your superannuation benefits relating to your employment with Entity 1 to the state public service fund (Fund 1). You commenced work with Entity 2 in 20XX which on occasion required lifting items when dealing with clients. You were diagnosed with a serious medical condition in 20XX. This medical condition extensively impacted your mobility and you could not physically return to work resulting in the commencement of a temporary disability benefit (payable for up to 2 years) through the employer superannuation plan of Entity 2. You thought you might get well and could resume work but your condition worsened and you were diagnosed with another serious medical condition in 20XX. This was followed by specific treatment. You could not return to work and continued on the temporary disability benefit. Due to financial problems, you looked into "accessing your benefits in Fund 1 on the grounds of permanent disability". You applied to Fund 1 for early release of your compulsorily preserved superannuation benefits and the application provided a definition of 'permanent incapacity' as meaning ill health whether physical or mental, where the Fund is reasonably satisfied that the member is unlikely because of ill health, ever again to engage in gainful employment for which the member is reasonably qualified by education, training or experience. The application also stipulated that a member is not entitled to the early release of compulsorily preserved benefits on the grounds of ill health unless Fund 1 has first determined that he or she is eligible to receive the benefit. You provided two medical reports to Fund 1 with certification details as follows: Medical report 1 - April 20XX § You were required to cease gainful employment in a full-time capacity because of your ill-health. § The disability was such that you will never again engage in gainful employment for which you are currently trained, educated or experienced. Medical report 1 - June 20XX § The medical condition will continue to permanently affect you and you were not able to perform your current occupation neither in a part-time nor a full-time capacity. § The ill health was such that you will never again engage in gainful employment for which you are currently trained by education, training or experience. Fund 1 advised you in 20XX that your application for early release of benefits had been processed. You received an eligible termination payment (ETP) in 20XX with the ETP Payment Summary which detailed the ETP components did not include a post-June 1994 invalidity component and tax was withheld from the ETP. Fund 1 released the whole of your superannuation benefits balance in Fund 1 but did not calculate a post-June 1994 invalidity component under section 27G of the Income Tax Assessment Act 1936 (ITAA 1936). . You questioned this with Fund 1 at the time and over the years, including again in May 20XX. Your view is that as you have left the fund and the matter is complex, Fund 1 appears unwillingly to fully address the issue to your satisfaction. You did not include the ETP that you received from Fund 1 in your 2006-07 income tax return. You now request an extension of time to amend your 2006-07 income tax assessment to include the ETP and request for the amount to be treated as an invalidity payment under section 27G of the ITAA 1936. You were aged 40 at the time the ETP was made in 20XX. During that time, you continued to receive the temporary disability benefit from Entity 2 until your termination of employment from Entity 2 in 20XX. Your termination date was in 20XX (as stated on the Employment Separation Certificate issued by Entity 2). You received a total and permanent disablement (TPD) benefit from the employer superannuation plan of Entity 2 in 20XX. You also provided a copy of the Disability Medical Report from Entity 2 (dated 20XX) which included the following details: § Your attendance in connection with your illness commenced in 20XX. § You became completely unable to perform all the normal duties of your occupation prior to your first review. § It stated you would not be able to ever engage in any other type of occupation for which you are reasonable qualified by education, training or experience because of profound physical weakness due to your illness.

Relevant legislative provisions: Income Tax Assessment Act 1936 Former section 27CB. | Income Tax Assessment Act 1936 Former subsection 27A(1). | Income Tax Assessment Act 1936 Former section 27G.

Reasons for decision: Summary: The ETP from Fund 1 is not an invalidity payment because it was not made in consequence of the termination of any employment at the time you received the ETP in 20XX. The first condition under former section 27G of the ITAA 1936 requires that the ETP be made in relation to a taxpayer in consequence of the termination of employment. As your termination of your employment with Entity 2 did not occur until 20XX, consequently, the ETP from Fund 1 does not qualify as an invalidity payment. | Detailed Reasoning - Detailed reasoning: Under former section 27CB of the ITAA 1936, the post-June 1994 invalidity component of an eligible termination payment (ETP) is not included in a taxpayer's assessable income. Former subsection 27A(1) defined a post-June 1994 invalidity component as so much of an ETP as consists of, or is attributable to, an invalidity payment made on or after 1 July 1994. Former section 27G of the ITAA 1936 sets out the conditions which need to be met in order for an ETP to be an invalidity payment. It states: Where: (a) an eligible termination payment is made in relation to a taxpayer in consequence of the termination of any employment of the taxpayer; and (b) the termination of the employment of the taxpayer occurred: (i) because of: (A) if the eligible termination is made before 1 July 1994 - the taxpayer's physical or mental incapacity to engage in that employment; or (B) if the eligible termination payment is made on or after 1 July 1994 - the disability of the taxpayer, where 2 legally qualified medical practitioners have certified that the disability is likely to result in the taxpayer being unable ever to be employed in a capacity for which the taxpayer is reasonably qualified because of education, training or experience; and (ii) before the last retirement date in relation to the employment, so much of the eligible termination payment as is equal to the amount ascertained in accordance with the formula: AB C where: A is the amount of the eligible termination payment; B is the number of whole days in the period from the date on which the termination occurred to the last retirement date; and C is the aggregate of the number of whole days in the eligible service period in relation to the eligible termination payment and the number of whole days represented by component B; is an invalidity payment in relation to the taxpayer. All conditions under former section 27G must be satisfied, and failure to satisfy any one will result in the payment not being an invalidity payment. | Detailed Reasoning - taxpayer: The first condition to be met is that there must be an ETP that is made 'in consequence of the termination of any employment of the taxpayer. The Full Bench of the High Court considered the expression 'in consequence of the termination of any employment' in the case of Reseck v. Federal Commissioner of Taxation (1975) 133 CLR 45; (1975) 49 ALJR 370; (1975) 5 ATR 538; (1975) 6 ALR 642; (1975) 75 ATC 4213 ( Reseck ). In that case, Justice Gibbs said: 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. In McIntosh v. Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325 ( McIntosh ), the Full Federal Court, in considering Reseck , emphasised that a payment may be 'in consequence of the termination of employment' even though the termination is not the dominant cause of the payment. Justice Lockhart stated: In my opinion his Honour [Justice Jacobs] was saying that the phrase includes the case where retirement or termination is a cause of the payment in question: but he was not excluding from the ambit of the phrase, payments which, although not following as a matter of causation from the termination of employment, nevertheless followed on the termination of employment and had connection therewith. …In other words a payment that is caused by the act of retirement from or termination of employment would fall within the test of a "following on", but so would other payments that do not have such causal connection, provided there is a link or connection between the termination of or retirement from employment and the making of the payments. The meaning of the phrase 'in consequence of the termination of employment' has also been considered in Taxation Ruling TR 2003/13. Paragraphs 5 and 6 of TR 2003/13 state: 5. …the Commissioner considers that 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. 6. The phrase requires 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. At the time when ETP from Fund 1 was made to you, you were in receipt of the temporary disability benefits through your employer superannuation plan with Entity 2 (Employer superannuation plan). You continued to receive the temporary disability benefits until your employment with Entity 2 was terminated in 20XX followed by the TPD benefit from the Employer superannuation plan. Although you ceased physical work with Entity 2 in 20XX and you were unable to return to your occupation due to your ill health, you continued to be an employee of Entity 2. You received a temporary disability benefit through your Employer superannuation plan representing 75% of your salary. The condition of your medical condition deteriorated and in 20XX you were also diagnosed with another serious medical condition followed by surgery. You were unable to return to employment with Entity 2 due to your ill health and continued to receive temporary disability benefits under the Employer superannuation plan including during and after the time when Fund 1 approved the early release of benefits under the condition of release due to permanent incapacity. Therefore it is evident you did not terminate your employment with Entity 2 during the period you were in receipt of the temporary disability benefits including the time when Fund 1 made the ETP to you in 20XX. The termination of your employment by Entity 2 did not occur until 20XX. This date is consistent with the Employment Separation Certificate that was issued to you which stated the "Date employee last worked for you" as a date in 20XX. The details on the final payment advice from Entity 2 also stated that in 20XX amounts for annual and long service leave were paid to you as amounts paid on resignation. The PAYG payment summary of 20XX also shows the TPD benefit from the employer superannuation plan was paid to you on the same day in 20XX which was following the termination of your employment with Entity 2 in 20XX. Therefore it can be seen that the payment of the lump sum superannuation benefits from Fund 1 only arose after your application for early release of the benefits (due to your permanent incapacity) was accepted and processed. However, the termination of any employment was not the occasion for the payment. It is also clear that the ETP from Fund 1 was not in consequence of your termination of employment with Entity 2 which occurred in 20XX. It can be established that the ETP you received in 20XX did not follow as an effect or result of the termination of any employment. In other words, it cannot be said that but for the termination of employment, the payment would not have been made to you. You received the ETP from Fund 1 in 20XX because your benefits were permitted to be released under the condition of release for permanent incapacity. As the first condition of former section 27G of the ITAA 1936 has not been satisfied it is not necessary to consider the remaining conditions of the provision. Consequently, the ETP from Fund 1 is not an invalidity payment as defined in former section 27G as all conditions under former section 27G must be satisfied, and failure to satisfy any one will result in the payment not being an invalidity payment. | Detailed Reasoning - Other relevant comments: It is noted that your request for an amendment to your 2006-07 income tax assessment is outside the period for amendment and you have not included the ETP from Fund 1 in your 2006-07 income tax return.

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