What is the employment termination payment (ETP) tax offset?
Employment Termination Payments or ETPs are payments made upon the termination of a person’s employment. They are not superannuation payments and cannot be rolled over into a superannuation fund. Generally they have two components:
- a tax free amount, which is not affected by the current measure, and
- a taxed amount.
The taxed amount is added to a person’s assessable income. A tax offset is available to ensure that the tax actually paid on this second component is no more than:
- 15 per cent (excluding Medicare levy) on the first $165 000 (in 2011–12, indexed), with the remainder taxed at marginal rates if the recipient is above his or her preservation age (55 to 60 depending on date of birth) or within one year of reaching this mark, or
- 30 per cent (excluding Medicare levy) on the first $165 000 (in 2011–12, indexed), with the remainder taxed at marginal rates, if the recipient is under his or her preservation age.
What is the proposed change?
Where the ETP received is not related to genuine hardship (i.e. genuine redundancy, invalidity compensation or death) the ETP offset will only apply to that part of this payment that takes the total income of the recipient to $180 000 (which is the income threshold where the top marginal rate commences to apply).
For example two people receive ETPs, neither of which relates to genuine hardship. Both are over their respective preservation ages; Jack receives an ETP on 30 June 2013 of $60 000. His annual income is $90 000 p.a.
At the same time Jill also receives an ETP of $60 000. Her annual income for that year was $170 000 p.a.
If this proposal did not go ahead Jack and Jill would respectively receive an offset of $13 200 and $17,200, so both would effectively pay income tax of $9 000 on their ETP (excluding Medicare levy).
Under this proposal Jill receives an offset of $2 200 relating to the $10 000 of her ETP that takes her to the $180 000 whole of income cap. Jack continues to receive the full $13 200 in offset as he is below the whole of income cap. Jack is no worse off, while Jill receives $15 000 less in taxpayer concessions for her payment.
Over the forward estimates period this proposal is expected to generate a total of $196.4m in net savings.
As at the date of writing press reaction to this particular measure highlighted:
- concerns that the proposed measure could be an additional cost on the redundancy payments made to the mining workforce, and
- a suggestion that some higher paid employees could bring forward their retirement date.
. D Kitney, ‘Extra slug on mining workforce’, the Australian, 10 May 2012, p. 25, viewed 10 May 2012.
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