"Simpler Super" and ETPs - "Eligible" becomes "Employment"

'Simpler Super' has rewritten the rules on eligible termination payments, with effect from 1 July 2007. Anna Tang explains the new concept and taxation of 'employment termination payments'. The changes go much deeper than the name.
 

The old term (and concept of) 'eligible termination payment' (Old ETP) has been replaced with the term (and concept of) 'employment termination payment' (New ETP). The way New ETPs are taxed is completely new.

What is a New ETP?

A New ETP is a payment the taxpayer receives within 12 months after, and because of:

  • the end of their employment; or
  • the end of another person's employment due to that person's death.

However:

  • payments for unused annual leave payments and for unused long service leave are not included as a New ETP; and
  • the Commissioner of Taxation may allow the period to be longer than 12 months.

The key changes - and the transitional provisions - are discussed below.

How much of a New ETP can go into super?

The new rules focus on restricting how payments are made into super (rather than how they come out). The rules for New ETPs result from the abolition of RBLs, and new contributions caps.

The two main ways a New ETP can be paid into super are: by the member or by the member's employer.

A New ETP must be paid directly to the member (or employee). The member then decides whether or not to pay the New ETP into their super. The most the member can pay in is limited by the non-concessional contributions cap of $150,000.

Old ETPs could be paid into super because the amount people would roll into super was governed, ultimately, by how the benefit was going to be taxed on the way out: namely, by the soon-to-be abolished RBLs. (But an Old ETP can no longer be paid into super.)

Now, most benefits won't be taxed on the way out. So the government has imposed the limit on how much you can put in, and on how you can do so.

Tax free and taxable components

New ETPs may contain both a tax-free and a taxable component.

The tax-free component are payments attributable to:

  • the taxpayer's employment before 1 July 1983; or
  • the end of the taxpayer's employment due to ill health - as long as 2 legally qualified medical practitioners have certified that the taxpayer is unlikely to ever be gainfully employed in a capacity for which the taxpayer is reasonably qualified.

The rest of the New ETP is taxable.

Transitional rules for the period 1 July 2007 - 1 July 2012

Transitional rules apply to the taxable component of a New ETP provided that:

  • the taxpayer was entitled to it immediately before 10 May 2006;
  • the taxpayer receives it between 1 July 2007 and 1 July 2012 - as long as the taxpayer was employed under a written contract, a law, an instrument under a law, or a workplace agreement; and
  • the contract, law, instrument or agreement specifies the amount of the payment or a way to work out a specific amount of the payment.

During the transitional period, if a taxpayer receives a transitional New ETP and:

  • is under their preservation age, then:
    • the first $1 million of the taxable component is taxed at 30%; and
    • the rest is taxed at the top marginal tax rate.
  • is over their preservation age, then:
    • the first $140,000 of the taxable component is taxed at 15%;
    • the rest up to $1 million is taxed at 30%; and
    • the balance is taxed at the top marginal tax rate.

How is a New ETP taxed under the new rules?

If a taxpayer has a New ETP (to which the transitional provisions do not apply), then tax is payable on the taxable component (see above about which components are taxable). The amount of tax payable depends on whether the payment is:

  • in relation to the end of the taxpayer's own employment - a life benefit termination payment; or
  • in relation to the end of someone else's employment due to their death - a death benefit termination payment.

These are discussed below.

How much tax is paid on a New ETP paid due to the end of the taxpayer's employment - a Life benefit termination payment

If during the 2007/2008 income year a taxpayer receives a life benefit termination payment as a New ETP (because of the end of their employment) and they are:

  • under their preservation age, then
    • the first $140,000 is taxed at 30%; and
    • the rest is taxed at the highest marginal tax rate.
  • over the preservation age, then:
    • the first $140,000 is taxed at 15%; and
    • the rest is taxed at the highest marginal tax rate.

The $140,000 threshold is indexed for payments made in later income years.

How much tax is paid on a New ETP paid due to the end of the taxpayer's employment - a Life benefit termination payment

If during the 2007/2008 income year a taxpayer receives a death benefit termination payment as a New ETP (because of the end of someone else's employment and death) and they:

  • are a dependant (under the Income Tax Assessment Act 1997), then:
    • the first $140,000 is tax free; and
    • the rest is taxed at the top marginal tax rate.
  • are not a dependant (under the Income Tax Assessment Act 1997), then
    • the first $140,000 is taxed at 30%; and
    • the rest is taxed at the top marginal tax rate.

The $140,000 threshold is indexed for payments made in later income years.

If a taxpayer receives a Death Benefit as trustee of a deceased estate, then the Death Benefit is taxed in the hands of the trustee in the same way as if the payment was made directly to the ultimate beneficiary.

More changes coming

The new rules are likely to be clarified by a yet to be released bill - as recommended by the Senate Standing Committee on Economics. We will keep you up to date through this email newsletter ClearLaw.

More information

For more information in relation to this article, contact Anna Tang on 03 9288 0555.

For more information about tax and revenue queries generally please contact Maddocks and ask for a member of the Maddocks Tax and Revenue Team:

  • in Melbourne on 03 9288 0555 or
  • in Sydney on 02 8223 4100.