Last updated: 1 January 2011

Employment termination payments

Due to the economic downturn, retrenchments may still be occurring. As such, it is worthwhile reviewing the implications of receiving various types of termination payments from an employer. In this Guide we outline the tax treatment of various payments made to employees upon termination of their employment. The different payment types covered include: Annual leave and long service leave payments Tax-free amounts relating to genuine redundancy or early retirement schemes, and Employment termination payments which must be taken as cash unless transitional rules apply.

We will also consider any relevant Centrelink implications and financial planning opportunities.

Table of contents
Unused annual leave and long service leave payments......................................................... 2 Genuine redundancy and early retirement schemes .............................................................. 2
Tax-free limit only applies to payments attributable to redundancy ........................................................................3 Completion of a fixed contract .................................................................................................................................4

Employment termination payments ......................................................................................... 4

12-month rule for concessional tax treatment .........................................................................................................5

Reasonableness test for amount of employment termination payments ............................. 5 Life benefit termination payments............................................................................................ 5
Employment termination payment cap ....................................................................................................................7 Transitional termination payments...........................................................................................................................7 Upper and Lower Cap Amounts ..............................................................................................................................8

Death benefit termination payments ........................................................................................ 9 Centrelink considerations ....................................................................................................... 10

Ordinary Waiting Period ........................................................................................................................................10 Liquid Assets Waiting Period.................................................................................................................................10 Income Maintenance Period..................................................................................................................................11 Voluntary unemployment non-payment period...................................................................................................13

Financial planning opportunities............................................................................................ 13 Related material ....................................................................................................................... 13 Appendix A: Transitional termination payment case studies .............................................. 14 Appendix B: Taxation of termination payment diagrams..................................................... 15

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Unused annual leave and long service leave payments

Lump sum payments representing unused annual and long service leave entitlements are taxable and cannot be rolled into superannuation to defer the tax payable. However, tax concessions may be available depending on when the leave accrued and the reason for the employees termination. An often asked question is whether the individual could negotiate to have any unused lump sum leave entitlement paid instead as a superannuation contribution. Invariably this will not be acceptable for tax purposes1 as it is likely to be seen as a redirection of income to which the employee is already entitled. In addition, breaches of industrial agreements and laws, including state based laws, may arise. For more information, see TapIn Guide: Salary Sacrifice. It is important to remember that generally, leave payments must be included in an individuals assessable income. As such, this may affect their entitlement to certain tax offsets and concessions such as Family Tax Benefit, Government co-contribution, Low income earner tax offset and the Senior Australian tax offset. The table below outlines the tax rates applicable to lump sum unused leave payments:
Taxation of lump sum unused leave payments Reason for payment Genuine redundancy, invalidity or early retirement scheme^ Accrual period Before 6 Aug 1978 Maximum rate of 30% On or after 16 Aug 1978 Before 16 August 1978 Resignation or retirement 16 August 1978 to 17 August 1993 On or after 18 August 1993 Death N/A Maximum rate of 30% Annual leave* Long service leave* 5% taxed at marginal tax rate Maximum of 30% 5% taxed at marginal tax rate Maximum of 30% 100% taxed at marginal tax rate Tax-free

100% taxed at marginal tax rate Tax-free

* plus Medicare levy ^ not applicable if age 65 or over at time of termination (see below)

Genuine redundancy and early retirement schemes

Where employment is terminated as a result of genuine redundancy or under an early retirement scheme, the employee may be entitled to a tax-free amount. A genuine redundancy occurs where an employee is dismissed from employment because the employees position is genuinely redundant. In other words, the employees position is no longer required by the employer and effectively no longer exists. An early retirement scheme is a scheme approved by the Commissioner providing for early retirement of a specified class of employees with a view to rationalising or reorganising the operations of the employer.

See ATO TR 2001/10.

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Before a payment can qualify as a genuine redundancy or early retirement scheme payment and benefit from the associated tax-free amount, it must meet the following conditions: the termination must occur prior to turning age 65 the payment cannot exceed the amount payable if dismissal was at arms length there must be no arrangement for the employer to employ the individual at a later date the payment must be more than the amount the employee would have received if they had voluntarily resigned or retired in other circumstances (discussed later) if the payment is a redundancy payment, the redundancy is genuine, or if the payment is an early retirement scheme payment, the employer has received ATO approval for the scheme.

For the 2010-11 financial year, the tax-free amount of a genuine redundancy payment or approved early retirement scheme is $8,126 plus $4,064 for every completed year of service. The tax-free amount of the payment is indexed in July each year. A payment from an employer in excess of the tax-free amount is an employment termination payment to the extent that it does not relate to unused lump sum annual leave or long service leave payments.

Tax-free limit only applies to payments attributable to redundancy

In order for part/all of a termination payment to qualify under the tax-free limit, that part of the payment must be specifically attributable to the termination of employment as a result of the redundancy. This means the employee would not have received that part of the payment if they had voluntarily resigned or retired. Where the employee would have received that part of the payment regardless of the reason for termination, for example because the employer is legally obliged to make such a payment, that part of the payment cannot form part of the tax-free amount but may form an employment termination payment.

Example 1 Unused sick leave forms part of employment termination payment Derek, aged 40, was employed under an industrial award which provides for employees to be paid their unused sick leave entitlements on termination of employment, regardless of the reason for their termination. Derek was made redundant (genuine redundancy) on 1 December 2010. Within his termination payment advice he received an amount representing a payment in lieu of notice, a severance payment and an amount representing unused sick leave. The payment of unused sick leave to Derek cannot form part of the tax-free amount because his employer already had an obligation to make this payment regardless of the reason for termination. However, the payment of unused sick leave will form part of an employment termination payment. In determining whether any part of the payment in lieu of notice and the severance payment could qualify under the tax-free limit, it would need to be determined whether the employer had an obligation to make these payments to Derek regardless of the reason for termination.

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Example 2 - Unused sick leave forms part of tax free amount Julie aged 28, was made redundant on 1 November 2010. Apart from her unused annual leave, she received an amount representing a payment in lieu of notice, a severance payment and an amount representing unused sick leave. Julie would have ordinarily received only the unused annual leave payment had she voluntarily terminated her employment. Accordingly, the additional payments to Julie are able to qualify under the tax-free limit as they are specifically attributable to the termination of her employment as a result of her redundancy.

Completion of a fixed contract

Generally where an employee was working under a fixed term contract, any termination payments received upon completion of the contract period will not qualify under the tax-free limit. This is because their employment simply terminated due to the arrangement to cease employment at that time, rather than due to a redundancy or under an early retirement scheme.

Employment termination payments

An employment termination payment is a lump sum payment made directly by an employer on or after 1 July 2007 in consequence of termination of an employees employment. It could be a: Life benefit termination payment made in consequence of the termination of employment for any reason other than death, or Death benefit termination payment made because of the death of an employee.

Employment termination payments commonly include the payments shown in the table below.
Examples of employment termination payments Payment Genuine redundancy payments in excess of the tax free amount Unused rostered days off Payments in lieu of notice Ex-gratia or golden handshakes Unused sick leave

As discussed above, an employment termination payment also includes a payment which does not qualify under the tax-free limit because the payment is not specifically attributable to the termination of employment due to redundancy (see example 1 on previous page). Employment termination payments do not include payments for unused annual leave, unused long service leave or the tax-free part of a genuine redundancy payment or an early retirement scheme payment.

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12-month rule for concessional tax treatment

For an employment termination payment to be entitled to concessional tax treatment, the payment must be made within 12 months of termination. Payments made outside the 12-month window will simply be included in the individuals assessable income and subject to tax at the individuals marginal tax rate. In certain circumstances, the Commissioner can allow a payment made after the 12-month period to qualify for the tax concessions. However, it appears that this might only be the case where the reason for the late payment is beyond the control of the employee, for example if there was a legal dispute over the entitlement or if the employer was in financial difficulty. Furthermore, the 12-month rule does not apply to genuine redundancy payments or early retirement scheme payments. This 12-month rule was introduced to prevent abuse of the tax concessions that could otherwise occur by splitting a payment over a number of years.

Reasonableness test for amount of employment termination payments

If a private company makes an employment termination payment to an associated person, the amount of the payment must be paid in good faith and cannot exceed an amount that the Tax Commissioner considers is reasonable. Taxation Ruling IT 2621 highlights some of the factors that are considered for the purpose of the reasonableness test: the terms of employment length of service level of remuneration during the period of service other benefits to which the retiree may be entitled commercial practice, and advice sought as to the quantum of amount paid.

If the employment termination payment is found to have been paid in good faith but is nonetheless excessive, the excess will be deemed to be an assessable dividend for the employee and will be nondeductible for the company.

Life benefit termination payments

Life benefit termination payments are those made to an employee in consequence of the termination of their employment for any reason apart from death. The first step in determining the tax treatment of a life benefit termination payment is to establish whether or not it has been paid under transitional rules. Transitional rules apply for individuals who were employed under an existing employment contract as at 9 May 2006. Payments made under these arrangements are known as transitional termination payments and are covered by different rules (discussed later). From 1 July 2007, life benefit termination payments (other than those falling under the transitional rules) must be paid in cash. The payment cannot be rolled over to superannuation or used to purchase a superannuation annuity.

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The tax treatment will depend on the age of the recipient and is outlined in the table below.
Taxation of life benefit termination payments Component Tax-free component Taxable component Recipient is under preservation age at end of financial year Recipient is preservation age or older at end of financial year
* plus Medicare levy ^ Employment termination payments cap

Tax treatment* Tax-free

First $160,000^ Balance over $160,000^ First $160,000^ Balance over $160,000^

Maximum 30% 45% Maximum 15% 45%

Tax-free component The tax-free component is the portion that relates to invalidity or to pre-1 July 1983 employment service calculated to the date of termination. This component is not included in assessable income for income tax purposes. Taxable component The balance of the employment termination payment is the taxable component, which is included in assessable income. The tax office provides a tax offset to ensure that the correct amount of tax, as outlined in the table above, is paid. However, the inclusion of this component in assessable income can affect a persons entitlement to other tax offsets and concessions such as Family tax benefit, Government co-contribution, Low income earner tax offset and the Senior Australian tax offset.

Example 3 Taxation of life benefit termination payment Leroy (age 46) received an employment termination payment of $150,000 on 1 August 2010. He had worked with his employer since 1 July 1981, so the payment had $10,294 of tax-free component due to the pre-July 1983 service, and $139,706 of taxable component. Leroys payment does not meet the transitional rules and therefore must be cashed. The tax treatment of Leroys employment termination payment is as follows: No tax will be paid on the tax-free portion. The maximum tax Leroy will pay on the taxable component is $44,007 (31.5% of $139,706).

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Employment termination payment cap

The employment termination payment cap is the maximum amount of employment termination payments a person can receive per annum at concessional tax rates. The employment termination payment cap for the 2010-11 financial year is $160,000. This cap will be indexed to AWOTE in increments of $5,000.

As the cap is applied on a per annum basis, a person can receive more than one employment termination payment in their lifetime at concessionally taxed rates providing each payment is in respect of a separate termination. However, if a person is unfortunate enough to be terminated more than once in any given financial year, only one $160,000 cap will apply to all payments in that particular year. To simplify this point, when considering an individuals $160,000 per annum threshold, it must be reduced by other employment termination payments received by the particular individual: earlier in the same financial year, and in previous years if relating to the same termination.

It is important to note that amounts counted towards this cap do not reduce the $160,000 low rate cap that the same individual can take concessionally from superannuation fund benefits once they reach preservation age. That is, the cap that applies to superannuation fund benefits is an entirely separate cap to this employment termination cap.

Transitional termination payments

Transitional rules will apply for termination payments received up to 30 June 2012 for individuals who were employed under certain employment contracts and arrangements existing as at 9 May 2006. Payments made under these qualifying arrangements are known as transitional termination payments. An individual receiving a transitional termination payment can choose to contribute the payment to a superannuation fund, use it to purchase a superannuation annuity or take it in cash, providing the payment is received prior to 1 July 2012. Payments contributed to superannuation or used to purchase a superannuation annuity are known as directed termination payments. To be eligible for the transitional rules, the employees arrangements must have, on 9 May 2006, stipulated a method or formula for determining the value of any termination payment. If the arrangements allowed for a discretionary payment, the transitional rules cannot be used.

The types of arrangements that may qualify are written contracts, those made under Australian or foreign law, legal instruments or workplace agreements made under the Workplace Relations Act 1996. Case studies relating to the transitional rules can be found in Appendix A. The tax treatment of a transitional termination payment taken in cash depends on the age of the employee.

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Taxation of transitional termination payment received in cash Component Tax-free component Taxable component Recipient is under preservation age at end of financial year First $1 million^ Balance over $1 million^ First $160,000# Recipient is preservation age or older at end of financial year $160,000# - $1 million^ Balance over $1 million^
* ^ # plus Medicare levy Upper cap amount Lower cap amount

Tax treatment* Tax-free

Maximum 30% 45% Maximum 15% Maximum 30% 45%

Upper and Lower Cap Amounts

For individuals who were employed under more than one qualifying employment arrangement on 9 May 2006, the above-mentioned caps ($160,000 and $1 million) apply to all transitional termination payments received during the transition period. The caps do not apply per termination but are a lifetime cap. The lower cap of $160,000 is for the 2010-11 income year and will be indexed to AWOTE in increments of $5,000. The upper cap amount of $1 million is not indexed. This means that each transitional termination payment received, whether contributed to a superannuation fund or cashed, will reduce the amount of cap remaining for the transition period. Directed termination payment (ie payments directly contributed to super) An individual has 30 days from receiving a pre-payment statement from their employer to elect for all or part of a transitional termination payment to be directly contributed to a superannuation fund. The individual must be eligible to contribute and can select the components that are to be contributed. The payment into the fund will be preserved until the member meets a condition of release. The tax treatment of a directed termination payment, as it enters the fund, is shown in the table below.
Taxation of directed termination payments upon contribution to super Component Tax-free Taxable Taxation in super fund on contribution Tax-free 15%^ Tax treatment for individual Not assessable and not exempt income Not assessable and not exempt income

^ Taxable components in excess of the $1 million upper cap amount (sourced from Directed Termination Payments) count towards the individuals concessional contribution cap as outlined in the example below.

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Example 4 Directed termination payment causing excessive contributions tax Michael (age 53) receives an employment termination payment of $1.5 million in January 2011. It consists entirely of taxable component. The payment meets the transitional rules and is the only such payment he has ever received. Michael decides to contribute this transitional termination payment into his superannuation fund. In 201011, he had already made non-concessional (personal after-tax) contributions of $450,000, and his employer had contributed $50,000 which was within his concessional contribution cap. The entire $1.5 million contribution will attract 15% contributions tax as it enters the fund. In addition, while the first $1 million does not count towards any cap, the $500,000 balance will count towards Michaels concessional contribution cap. In this example, this amount is entirely in excess of the concessional cap thereby attracting an additional 31.5% tax personally, which Michael can ask the fund to pay. Further, as this contribution is $500,000 in excess of his concessional cap, it must also be counted towards his non-concessional cap. In this example, it is also in excess of Michaels non-concessional cap so the $500,000 attracts further tax of 46.5%, which must be paid from the fund. Total tax payable on the $500,000 in excess of the $1 million: $ 75,000 $157,500 $232,500 $465,000 contributions tax excess concessional contributions tax excess non- concessional contributions tax or 93%

Death benefit termination payments

A death benefit termination payment is a lump sum payment made to an employees estate or beneficiary because of the death of the employee. Death benefit termination payments must be paid in cash and cannot be rolled over. The tax treatment depends on whether the payment is made to a dependant or non-dependant (using the tax definition of dependant) of the deceased.
Taxation of death benefit termination payments Component Tax-free component Taxable component First $160,000^ Paid to a tax dependant Balance over $160,000^ First $160,000^ Paid to a tax non-dependant Balance over $160,000^
* plus Medicare levy where paid directly to individual ^ death benefit employment termination payment cap

Tax treatment* Tax-free

Tax-free 45% Maximum 30% 45%

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A death benefit termination payment paid to the trustee of a deceased estate is taxed depending on whom the final beneficiary is. For example, if the estate distributes the death benefit termination payment to a non-dependant, the trustee of the estate is required to pay tax at the non-dependant rates as per the table on the previous page (minus the Medicare levy). As with life benefit termination payments, the $160,000 per annum cap is reduced by any other death benefit termination payments received in the same year or in a previous year in relation to the same termination of employment. The death benefit employment termination payments cap operates independently of the life benefit employment termination payments cap. That is, any death benefit employment termination payments received do not count towards the life benefit employment termination cap. Similarly, any life benefit employment termination payments received do not count towards the death benefit employment termination payments cap.

Centrelink considerations
A further consideration following the cessation of employment is the impact that the reason for the termination, and any employer termination payments received, can have on the individuals eligibility for Centrelink benefits. An individual hoping to qualify for certain allowances or the Disability Support Pension may have to serve a liquid assets waiting period and/or an income maintenance period if they have received certain employer payments in cash. An ordinary waiting period or a non-payment period may also need to be served.

Ordinary Waiting Period

An individual applying for Newstart Allowance2 will generally need to serve a one week waiting period. This waiting period will start from the date of claim unless the individual is subject to a liquid assets waiting period, in which case it will start from the day after the liquid assets waiting period (discussed below) ends. Where the individual serves an income maintenance period, the ordinary waiting period can generally be served concurrently with the income maintenance period.

Liquid Assets Waiting Period

An individual applying for Newstart Allowance3 will generally need to serve a liquid assets waiting period based on the total liquid assets available to them. Liquid assets include cash, bank accounts, term deposits, amounts held in mortgage offset accounts, insurance bonds etc.

2 3

The ordinary waiting period also relates to Sickness Allowance. The liquid assets waiting period also applies to Sickness and Youth Allowances and Austudy.

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The length of the liquid assets waiting period is calculated as shown in the table below.
Calculating the length of the liquid assets waiting period Type of individual A member of a couple* OR A single person with a dependent child A single person who does not have a dependent child Liquid assets waiting period (weeks) (liquid assets - $10,000^) $1,000 (liquid assets - $5,000^) $500

* When calculating the LAWP for a member of a couple, combined liquid assets are used. ^ These are the maximum reserve amounts introduced for the period 1 April 2009 31 March 2011.

The liquid assets waiting period commences from the day after the person ceased work and can be served concurrently with the income maintenance period (discussed below). In addition, the maximum liquid assets waiting period an individual can be asked to serve is capped at 13 weeks. Further, where a part week is involved, this part week is ignored as the number of weeks is rounded down to the nearest whole week. This also means that where an individuals liquid asset waiting period is calculated as less than one week, there is no liquid asset waiting period to be served. Calculating liquid assets It is important to note that the individual or their partner can make one voluntary payment on a debt (or on a number of debts) after becoming unemployed, with the non-compulsory amount(s) of such a payment being disregarded when calculating the individuals liquid asset level. However, this can be done only where: the debt is not related to the principal home or any other residential property the payment is voluntary, (i.e., more than the minimum payment), and the payment is the first voluntary payment made on that debt since the recipient became unemployed.

For example, assume an individual has an outstanding credit card balance of $2,000. If the minimum payment is $25, but the individual pays the outstanding balance in full, their liquid assets will be reduced by $1,975.

Income Maintenance Period

Individuals who are applying for Newstart Allowance or Disability Support Pension may also need to serve an income maintenance period.4 Under the income maintenance period, Centrelink will deem the total amount of certain payments received upon termination of employment as income to be spread out over a particular period commencing on the day the payments are received. This period is calculated as shown on the following page.

The income maintenance period also applies to Sickness, Youth and wWdow allowances, Austudy and Parenting Payment.

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Calculating the income maintenance period The length of the income maintenance period is calculated by adding together: The number of weeks any leave payments represent. The number of weeks the portion of the redundancy payment, based on the employee's wage, represents (e.g. 2 weeks payment for every year of service). The number of weeks the portion of the redundancy payment NOT based on the employee's wage represents but then rounded down to a whole week figure (e.g. a gratuity payment). This is obtained by dividing the redundancy payment (less any roll over amounts) by the relevant weekly wage* and then rounding down this figure to a whole week figure. A 5 day working week is used.
* For the purposes of the income maintenance period relevant weekly wage refers to the average wage paid to the worker in the job that the person has left. Different workplaces may have different regulations which detail the elements that make up the relevant or standard weekly wage. Some workplaces include regular overtime and allowances as part of their standard weekly wage. The definition of a standard weekly wage is usually contained in the industrial instrument that applies to that workplace (for example, the appropriate award, workplace agreement or common law contract).

As the individual will be seen to be earning income over this income maintenance period, Centrelink entitlements are likely to be reduced. Unless the individual was on a relatively low salary/wages, the income maintenance period usually precludes the individual from receiving any Centrelink benefits during this period. The income maintenance period can also impact the persons partner if they are applying for a payment affected by the income maintenance period. The following payments are included in the income maintenance period: Employment termination payments received in cash Annual leave and long service leave payments Tax-free amounts relating to genuine redundancy or early retirement schemes.

Directed termination payments (ie, those contributed to super under the transitional rules) are excluded from the income maintenance period.

Example 5 Calculating the income maintenance period Bruce was retrenched from a firm on 13 December 2010 after 10 years of service. He received a $60,000 gross redundancy payment including: Three weeks unused annual leave payment of $4,500 A severance payment totalling $55,500 consisting of: $48,766 being a tax-free genuine redundancy payment $6,734 being an employment termination payment which he took as cash. Prior to terminating employment, Bruce was on an annual salary of $78,000 ie $1,500 per week. His income maintenance period will be calculated as follows: Unused annual leave payment of $4,500 = 3 weeks, plus Severance payment of $55,500 = $55,500 / $1,500 = 37 weeks Therefore the income maintenance period is a total of 40 weeks.

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This means that for Centrelink purposes, he will be deemed to be earning income of $1,500 per week for the 40 week period. As a result, under the income test this level of income is likely to make him ineligible for certain social security benefits for a period of 40 weeks.

Voluntary unemployment non-payment period

Where an individual wishes to apply for Newstart Allowance after leaving employment voluntarily or due to misconduct, they may need to serve an 8 week non-payment period. This non-payment period commences from the date employment ceased and can be served concurrently with other waiting periods.

Financial planning opportunities

There are limited financial planning opportunities in relation to employment termination payments as outlined below.

Defer taking the payment until after preservation age

A client receiving an employment termination payment in the financial year in which they reach preservation age will pay 15% less tax on the first $160,000 than a client below preservation age.

Defer taking the payment until the new financial year

If a client's income is expected to fall in the new financial year, there may be a benefit in deferring the termination and receipt of the payments until after 1 July. The tax rates applying to most employment termination payments are maximum rates, so if a clients marginal tax rate for the year is lower than the maximum rate, it is the lower rate that will apply to the payments. If your clients employment income in the new financial year is less than 10% of their total income (ie, maybe they have retired or reduced their work hours), the client may be eligible to make a deductible contribution into superannuation to help offset the tax payable on the employer payments.

Consider the effect the redundancy payments will have on waiting periods for social security benefits
Where an individual contributes their (transitional) directed termination payment into superannuation, the payment is excluded from the calculation of any income maintenance period applying. Consequently this may result in increased Centrelink benefits, or earlier access to Centrelink benefits. Where the individual is applying for Newstart Allowance, they should consider making one voluntary payment on those debt(s) which are not related to their principal home or other residential property to reduce their liquid assets for the liquid asset waiting period.

Related material
TapIn Guides provide a comprehensive technical reference on specific advice areas. There are various guides available and these can be located on Planner Portal at Resources Advice & technical Reference materials TapIn Guides.
Disclaimer
The information provided in this TapIn Guide is believed to be accurate and reliable as at 1 January 2011 and is of a general nature only. It is for professional planner use only - it is not to be distributed to clients. It is provided by AMP Life Limited ABN 84 079 300 379. AMP Life is not responsible for any errors or omissions.

Produced by TapIn
For technical enquiries call the TapIn Help Centre on 1300 300 651.

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Appendix A: Transitional termination payment case studies

Case Study Tricia5

After 10 years service Tricia, aged 48, was terminated because of genuine redundancy on 30 November 2010. As a result, she received $200,000 in the 2010-11 financial year, excluding annual and long service leave. Tricia would not have been entitled to any of the $200,000 if she had resigned. As per the enterprise agreement in place on 9 May 2006, Tricia was entitled to receive a payment, if she terminated due to genuine redundancy, of $150,000. The balance of $50,000 was an ex-gratia payment made by her employer due to the genuine redundancy but was not made pursuant to an agreement in place as at 9 May 2006. As Tricia has 10 years service, she is entitled to a tax-free redundancy payment of $48,766. The remainder of the payment of $151,234 is therefore an employment termination payment. As $150,000 of this payment was payable on redundancy in accordance with an agreement in place just before 10 May 2006, this portion of the employment termination payment amount is a transitional termination payment which can be directed (contributed) to superannuation. The remaining $1,234 is not a transitional termination payment so will have to be cashed.

Case study Andy6

Andy, aged 66 was covered by a workplace agreement as at 9 May 2006. This agreement included provisions regarding payments in lieu of notice in the event of termination of employment. He then entered into a new agreement after 10 May 2006 which replaced the agreement that was in force just before 10 May 2006. Both the old and the current agreements were identical with regard to a payment in lieu of notice in the event of termination of employment. Andy was retrenched on 1 January 2011 and as per the current agreement he receives a payment in lieu of notice. The payment is an employment termination payment as there is no tax-free amount applying (due to Andys age). The payment in lieu of notice was made to Andy under the provisions of the agreement which was first entered into on or after 10 May 2006. Consequently the payment does not meet the definition of a transitional termination payment and therefore cannot be directed into superannuation. It is irrelevant that the entitlements relating to payments in lieu of notice are the same under both the current agreement and the old agreement that was in force just before May 2006.
56

5 6

This case study is based on ATO ID 2008/134. This case study is based on ATO ID 2007/163.

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Appendix B: Taxation of termination payment diagrams

Diagram 1: Taxation of life benefit termination payments from 1 July 2007

Is life benefit termination payment

1

paid under transitional rules?

No - must be cashed

Yes see diagram 2

Tax-free component

Taxable component

Notes:
1. Employer payment specified in an existing employment arrangement as at 9 May 2006 and payment made prior to 1 July 2012. This is a per annum limit.

First $160,000 (indexed)

Balance

2.

* Add Medicare Levy

Under preservation age at end of financial year

Over preservation age at end of financial year

Note: Taxable amounts are 100% included in assessable income. Tax rates are maximum rates except where the top marginal rate applies (as this is a flat rate).

Tax-free

30% tax*

15% tax*

Top MTR*

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Diagram 2: Taxation of life benefit termination payments from 1 July 2007 to 30 June 2012 transitional rules
Is life benefit termination payment paid under
1

transitional rules?

Yes

Notes 1. Employer payment specified in an existing employment arrangement as at 9 May 2006 and payment made prior to 1 July 2012. 2. This is a lifetime limit 3. Not counted in contribution caps 4. Counts towards contributions caps (see example in Guide) * Add Medicare Levy Note: Taxable amounts are 100% included in assessable income. Tax rates are maximum rates except where the top marginal rate applies (as this is a flat rate).

Take as cash

Contribute to super (before 1 July 2012)

Tax-free component

Taxable component

Tax-free component

Taxable component

First $160,000 (indexed)

Balance to $1m

Excess over $1m

First $1m

Over $1m

Under preservation age at end of financial year

Over preservation age at end of financial year

Taxfree

30% tax*

15% tax*

30% tax*

Top MTR*

Taxfree

15% contributions tax

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Diagram 3: Taxation of death benefit termination payments from 1 July 2007

Is the death benefit termination payment paid to a
1

dependant or non-dependant?

Notes: 1. A dependant is: spouse or former spouse, child, aged less than 18 interdependent person any financial dependant of the deceased. 2. This is a per annum limit. * Add Medicare Levy

Dependant

Non-dependant

Tax-free component

Taxable component

Tax-free component

Taxable component

Note: Taxable amounts are 100% included in assessable income. Tax rates are maximum rates except where the top marginal rate applies (as this is a flat rate).

First

Balance

First

Balance

$160,000 (indexed)

$160,000 (indexed)

Tax-free

Tax-free

Top MTR*

Tax-free

30% tax*

Top MTR*

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