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					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 employee’s 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 individual’s
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                   Accrual period                     Annual leave*            Long service leave*

    Genuine redundancy,                  Before 6 Aug 1978                                           5% taxed at marginal tax
    invalidity or early retirement                                          Maximum rate of 30%      rate
    scheme^                              On or after 16 Aug 1978                                     Maximum of 30%
                                         Before 16 August 1978                                       5% taxed at marginal tax
                                                                                                     rate
                                                                            Maximum rate of 30%
                                         16 August 1978 to 17                                        Maximum of 30%
    Resignation or retirement
                                         August 1993
                                         On or after 18 August 1993         100% taxed at marginal   100% taxed at marginal
                                                                            tax rate                 tax rate
    Death                                N/A                                Tax-free                 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
employee’s position is genuinely redundant. In other words, the employee’s 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.




1
    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 arm’s 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 employee’s 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 individual’s assessable income and subject to tax at the individual’s 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 non-
deductible 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 treatment*

 Tax-free component                                          Tax-free

 Taxable component

                                                             First $160,000^          Maximum 30%
    Recipient is under preservation age at end of
    financial year
                                                             Balance over $160,000^   45%

                                                             First $160,000^          Maximum 15%
    Recipient is preservation age or older at end of
    financial year
                                                             Balance over $160,000^   45%

* plus Medicare levy
^ Employment termination payments cap


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 person’s 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.

Leroy’s payment does not meet the transitional rules and therefore must be cashed. The tax treatment of
Leroy’s 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 individual’s $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 employee’s 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 treatment*

    Tax-free component                                           Tax-free

    Taxable component

                                                                 First $1 million^                 Maximum 30%
      Recipient is under preservation age at end of
      financial year
                                                                 Balance over $1 million^          45%

                                                                 First $160,000#                   Maximum 15%
      Recipient is preservation age or older at end of
                                                                 $160,000# - $1 million^           Maximum 30%
      financial year
                                                                 Balance over $1 million^          45%

*     plus Medicare levy
^     Upper cap amount
#     Lower cap amount



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              Taxation in super fund on contribution              Tax treatment for individual

    Tax-free               Tax-free                                            Not assessable and not exempt income
    Taxable                15%^                                                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
  individual’s 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 2010-
11, 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 Michael’s 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 Michael’s 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             contributions tax
          $157,500             excess concessional contributions tax
          $232,500             excess non- concessional contributions tax
          $465,000             or 93%



Death benefit termination payments
A death benefit termination payment is a lump sum payment made to an employee’s 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 treatment*

 Tax-free component                                                     Tax-free

 Taxable component

                                                                        First $160,000^          Tax-free
    Paid to a tax dependant
                                                                        Balance over $160,000^   45%

                                                                        First $160,000^          Maximum 30%
    Paid to a tax non-dependant
                                                                        Balance over $160,000^   45%
* plus Medicare levy where paid directly to individual
^ death benefit employment termination payment cap




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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 individual’s 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
    The ordinary waiting period also relates to Sickness Allowance.
3
    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                                                 Liquid assets waiting period (weeks)

     A member of a couple* OR                                         (liquid assets - $10,000^) ÷ $1,000
     A single person with a dependent child
    A single person who does not have a dependent child                (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 individual’s 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 individual’s 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.




4
    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 person’s 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 client’s 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 client’s 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 Andy’s 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
    This case study is based on ATO ID 2008/134.
6
    This case study is based on ATO ID 2007/163.




TapIn Guide                                        For planner use only                   Page 14 of 17
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                      Taxable component                                  Notes:
              component
                                                                                                1.   Employer payment specified in an existing
                                                                                                     employment arrangement as at 9 May 2006
                                                2                                                    and payment made prior to 1 July 2012.
                               First $160,000 (indexed)              Balance                    2.   This is a “per annum” limit.

                                                                                                * Add Medicare Levy

                                 Under               Over                                       Note: Taxable amounts are 100% included in
                             preservation       preservation                                    assessable income. Tax rates are maximum
                              age at end         age at end                                     rates except where the top marginal rate applies
                              of financial       of financial                                   (as this is a flat rate).
                                  year               year




              Tax-free        30% tax*          15% tax*               Top
                                                                       MTR*



TapIn Guide                                                         For planner use only                                                           Page 15 of 17
Diagram 2: Taxation of life benefit termination payments from 1 July 2007 to 30 June 2012 – transitional rules

                                                                                         Notes
                     Is life benefit termination payment paid under                      1. Employer payment specified in an existing employment arrangement as at 9 May 2006 and
                                                          1                                 payment made prior to 1 July 2012.
                                   transitional rules?                                   2. This is a “lifetime” limit
                                                                                         3. Not counted in contribution caps
                                                                                         4. Counts towards contributions caps (see example in Guide)
                                                                                         * Add Medicare Levy
                                              Yes                                        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                                     Taxable component                                                  Tax-free                 Taxable component
         component                                                                                                       component



                                                2
                                                                      Balance            Excess                                                   First                   Over
                                First $160,000 (indexed)                                                                                              3                        4
                                                                      to $1m            over $1m                                                 $1m                      $1m

                                  Under                  Over
                              preservation          preservation
                               age at end            age at end
                               of financial          of financial
                                   year                  year



              Tax-              30%                     15%            30%               Top                                 Tax-                 15% contributions tax
              free              tax*                    tax*           tax*             MTR*                                 free




TapIn Guide                                                                   For planner use only                                                                         Page 16 of 17
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,
                                          1                                                                                child, aged less than 18
                          Dependant                                                  Non-dependant                         interdependent person
                                                                                                                           any financial dependant
                                                                                                                           of the deceased.

                                                                                                                       2. This is a “per annum” limit.

                                                                                                                       * Add Medicare Levy
              Tax-free       Taxable component                         Tax-free                  Taxable component
              component                                                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
                                     2                                                                   2
                           $160,000                                                        $160,000
                           (indexed)                                                       (indexed)




              Tax-free     Tax-free                Top                  Tax-free           30% tax*           Top
                                                   MTR*                                                       MTR*




TapIn Guide                                                               For planner use only                                                       Page 17 of 17

				
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