Does the payment in lieu of notice for $XX,XXX.XX received by the Applicant contain an invalidity segment under section 82-150 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes. This ruling applies for the following period : Income year ended 30 June 20XX The scheme commenced on: 1 July 20XX
The Applicant is xx years of age. The Applicant commenced employment with the Employer on Date A. The Applicant's medical condition, was first diagnosed on Date B. On Date C it was deemed to have progressed to a terminal stage. From Date D, the Applicant had exhausted their medical leave and started leave without pay. The Applicant started receiving reduced salary payments that were funded through the Employer's salary continuance insurance (SCI) policy. The Applicant provided a letter, referring to a meeting held in relation to their employment as well as previous discussions. The letter stated it was the Employer's understanding that the Applicant would not be capable of performing the inherent requirements of their current role for the foreseeable future, and they were considering terminating their employment on these grounds. The Applicant's employment was terminated on Date E because of their invalidity, which prevented them from fulfilling all the duties of the role.
Two medical doctors provided certified medical reports of the Applicant's medical condition on numerous occasions. Some of these were required under the Employer's human resources policies, and some were required to claim the SCI payment under their insurance policy. The Applicant's employment contract did not specify a date or age that their employment would normally cease. The Applicant provided a copy of a number of emails between their Employer and themselves, as to why the ETP for payment in lieu of notice did not calculate an invalidity component. Two medical reports were supplied showing that the Applicant was not able to return to work in any capacity.
Income Tax Assessment Act 1997 section 82-140 Income Tax Assessment Act 1997 section 82-145 Income Tax Assessment Act 1997 section 82-150 Income Tax Assessment Act 1997 section 82-160 Income Tax Assessment Act 1997 subsection 995-1(1)
Detailed reasoning Where a person's employment is terminated because of ill-health, and the person receives an ETP, part of the payment may be tax-free. This component is called an invalidity segment. Section 82-140 of the ITAA 1997 states the Tax free component of an employment termination payment is so much of the payment as consists of the following: (a) the invalidity of the payment; (b) the pre-July 83 segment of the payment. The taxable component of an ETP under section 82-145 of the ITAA 1997 is the amount of the payment less the tax free component of the payment. Section 82-150 of the ITAA 1997 looks at what is an invalidity segment of an ETP. Subsection 82-150(1) states an ETP includes an invalidity segment if: (a) the payment was made to a person because they stop being gainfully employed; and (b) the person stopped being gainfully employed because they 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 they are reasonably qualified because of education, experience or training. Gainfully employed' is defined in subsection 995-1(1) of the ITAA 1997 as follows: gainfully employed means employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. The Macquarie Dictionary defines 'gainful' as 'profitable; lucrative'. In the context of the term 'gainfully employed', the adverb 'gainfully' describes the nature of the employment, being that it is a profitable pursuit, and within that term, 'gainfully' refers to the employment being for gain or reward Macquarie Dictionary also defines 'employ' as 'to use the services (of a person); have or keep in one's service; keep busy or at work.' Applying this to the context in which it appears, 'employed' refers to where a person's services will be used, or kept available for use, by the employer, in one of the named pursuits, and to be 'gainfully employed', they must be employed for reward or gain.
In this case, the Applicant was advised by the Employer that their employment was terminated on Date E. Under subsection 82-150(1) of the ITAA 1997, cessation of gainful employment is relevant to determining whether there is an ETP invalidity segment, with a payment being made to a person because he or she stops being gainfully employed being the first requirement. It is considered that, in this case, that requirement has been met. The payment has been made to the Applicant because they stopped being gainfully employed. The second requirement for an ETP to include an invalidity segment is that the person stopped being gainfully employed because they suffered from ill-health, either physical or mental. The two medical certificates referenced, state that the Applicant suffered ill-health that ended their gainful employment. Therefore, this requirement has been satisfied. The third requirement is that the gainful employment stopped before the Applicant's last retirement date. The Applicant is XX years of age. Their last retirement date at age 67 is Date F. The Applicant's employment was terminated on Date E. The third requirement has been satisfied.
The fourth requirement for an ETP to include an invalidity segment is that two 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 they are reasonably qualified because of education, experience or training. The two medical certificates state the following: § The Applicant will never be able to return to their role due to permanent incapacity. § The Applicant will never be able to return to work in any other occupation. § The Applicant's limitations are permanent and untreatable. The medical certificates have been signed by legally qualified medical practitioners. As such, the above requirement has been satisfied. Based on the provided information the Applicant's ETP satisfies all requirements prescribed under subsection 82-150(1) of ITAA 1997. Tax exemption for an invalidity payment Section 82-150(2) of the ITAA 1997 is used to work out the invalidity segment by applying the following formula: Amount of ETP × (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. And the employment days is the number of days of employment to which the payment relates. Reference to the ETP cap amount is made under section 82-160 of the ITAA 1997. The ETP cap amount is indexed annually. The formula under section 82-150(2) of the ITAA 1997 has been applied to calculate the invalidity segment of the Applicant's ETP. Based on the calculation the invalidity segment of the Applicant's ETP is $X. The ETP balance is the ETP amount of $X - the invalidity segment amount of $X leaving an ETP balance of $X. This is the taxable component of the ETP.