Tax Payable on an ETP

The tax payable on an ETP depends on your age when your employment is terminated. If you have reached preservation age in the income year your employment is terminated, a maximum tax rate of 17% (including the Medicare levy) applies up to a cap amount. If you have not reached preservation age in the income year, a maximum tax rate of 32% (including the Medicare levy) applies to the ETP up to a cap amount. This is referred to as receiving concessional tax treatment or being eligible for the ETP tax offset. ETP amounts more than the cap, regardless of your age, are taxed at the highest marginal tax rate of 49% (including the Medicare levy).

Example 1: Employment termination payment with an invalidity segment

Jackson started work with XYZ Pty Ltd on 1 September 2008. He is no longer able to work on medical grounds and is terminated on 20 September 2016 due to invalidity. Jackson will turn 65 years old on 25 September 2017. XYZ Pty Ltd is going to pay Jackson an ETP that is made up of the following payments:

Because each payment is made in consequence of termination due to invalidity, the whole ETP ($102,000) is considered for the purposes of determining the invalidity segment.

XYZ applies the invalidity formula to determine the invalidity segment:

$30,514 of the $102,000 is the invalidity segment, which is the tax-free component, and the remaining $71,486 is the taxable component. The ETP cap (only) applies to the payment and, as it is all below the cap ($195,000 for 2016-2017) it is taxed at a lower tax rate. As Jackson is above preservation age, XYZ calculates the withholding amount as $12,152.62 (17% of $71,486) and issues Jackson an ETP payment summary with the following information:

Source:

https://www.ato.gov.au/individuals/working/in-detail/leaving-a-job/taxation-of-termination-payments/?anchor=Example1#Example1

Topic: 40905