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ETPs can be paid in multiple parts and may contain an excluded payment (for example, genuine redundancy payments) and non-excluded payments (for example, gratuities). The ETP cap amount will be applied separately to the excluded and non-excluded payment parts.
If an ETP consists of two parts, the part that is an excluded payment (if any) is taken into account first. Your employer will need to issue two ETP payment summaries:
Example 12: Single ETP with excluded and non-excluded ETPs
Robyn received a single termination payment of $170,000 in 2014-2015. This consisted of two parts – a $50,000 gratuity that is non-excluded (subject to the lesser of the whole-of-income cap or ETP cap); and $120,000 compensation for unfair dismissal that is excluded (subject to the ETP cap only). Robyn also earned $20,000 in salary and wages.
Even though the two ETP components were part of the one payment, Robyn's excluded payment is taken as being received first. The entire $120,000 of her compensation payment is an excluded payment and will be taxed at a concessional rate because it is less than the ETP cap. The remaining balance of the ETP cap is $75,000 ($195,000 for 2014-2015, minus $120,000.)
The gratuity part of Robyn’s ETP will be subject to the lesser of the two caps. Robyn’s whole-of-income cap is $180,000 reduced by her $20,000 salary. This means Robyn's whole-of-income cap is $160,000.
Because Robyn's ETP cap ($75,000) is the lesser of the two caps, it will apply to her $50,000 gratuity. As a result, all of Robyn's gratuity will receive concessional tax treatment – that is, the ETP tax offset.
In total, Robyn is eligible for the ETP tax offset on her entire $170,000 termination payment.
Source:
Example 13: Excluded (genuine redundancy) and non-excluded payments, and unused leave payments
After five years service Alec who is aged 30 is made redundant from his place of work and receives the following payments in his termination pay:
Redundancy pay |
$34,500.00 |
Unused sick leave |
$6,178.50 |
Payment in lieu of notice |
$1,723.42 |
Unused annual leave |
$5,234.17 |
Unused long service leave |
$11,423.91 |
Gratuity |
$25,000.00 |
Under Alec's agency agreement, payment in lieu of notice and the gratuity are payable on termination of employment i.e. they are paid for any type of departure including voluntary termination. Alec's employer has contacted the ATO and has confirmed that his redundancy meets the conditions of a genuine redundancy. This means the redundancy payment and unused sick leave payment are in excess of what was reasonably expected to be paid for a voluntary termination.
The redundancy pay and unused sick leave payment are excluded payments and the ETP cap only applies. The payment in lieu of notice and gratuity are non-excluded payments and the lesser of the ETP cap or whole-of-income cap applies.
Alec had previously received $140,000 in other taxable payments (salary and wages) during the financial year.
His termination pay will be taxed as follows:
Step |
Action |
Result |
1 |
Calculate the genuine redundancy payment The redundancy payment and unused sick leave qualify as genuine redundancy: $34,500 + $6,178 |
$40,678 |
2 |
Calculate the tax-free limit on the genuine redundancy payment The tax-free amount in 2016-2017 is $9,936 + $4,969 for each completed year of service. Alec has five years of completed service: $9,936 + (5 x $4,4969) Note: The result is shown at label D on a PAYG payment summary - individual non-business (NAT 0046). |
$34,781 |
3 |
Calculate the taxable component of the genuine redundancy payment This is the genuine redundancy payment from step 1 less the tax-free limit amount from step 2: $40,678 - $34,781 Note: The result is shown at taxable component on a PAYG payment summary - employment termination payment with ETP code R. As this payment is an excluded payment, only the ETP cap applies. Alec is under the preservation age and the excluded payment of $5,897 will be taxed at 32%. |
$5,897 ETP code R |
4 |
Calculate the remaining ETP Cap This amount is the ETP cap ($195,000 for 2016-17) less the taxable component of the excluded ETP (from step 3): $195,000 - $5,897 |
$189,103 |
5 |
Calculate non-excluded payment The non-excluded payment is the payment in lieu of notice and the gratuity: $1,723 + $25,000 Note: The result is shown at taxable component on a separate PAYG payment summary - employment termination payment with ETP code O. |
$26,723 ETP code O |
6 |
Calculate the whole-of-income cap This is the whole-of-income cap ($180,000) less other taxable income: $180,000 - $140,000 (salary and wages) = $40,000 This amount is further reduced by the taxable payments for unused annual and long service leave: $40,000 -$16,657 = $23,343 The whole-of-income cap is not reduced by the excluded part of the termination payment in this case because it was received at the same time as the non-excluded payment – that is, it was not received earlier in the income year. |
$23,343 (Calculated whole-of-income cap) |
7 |
Determine the lower of the ETP caps Alec will receive the lower of the remaining ETP cap or the whole-of-income cap: Remaining ETP cap (from step 4) $189,103 Calculated whole-of-income cap (from step 6) $13,491 The whole-of-income cap will apply to Alec's non-excluded payments as the cap is lower than the remaining ETP cap. |
$13,491 (Calculated whole-of-income cap is the lower cap) |
8 |
Apply the calculated whole-of-income cap to non-excluded payment Non-excluded ETP less calculated whole-of-income cap: $26,723 -$13,491 = $13,232. Therefore, only $13,491 of the total non-excluded ETP will be below the whole-of-income cap and will be taxed concessionally at 32%. The remaining $13,234 is above the whole-of-income cap and will be taxed at the highest marginal rate. |
$13,491 taxed at 32%. $13,232 taxed at 49%. |
Note: Alec's payments for unused annual and long service leave totalling $16,657 are taxed separately. Refer to Tax table for unused leave payments on termination of employment (NAT 3351).
Source:
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Topic: 40913
