Tax on Termination Payments

Treasury recently clarified taxes on superannuation payments as an outcome of the last budget.

Superannuation benefits and employer ETPs have been counted together for assessment against Reasonable Benefit Limits. The decision to remove RBLs for superannuation has caused a review of the taxation of employer ETPs, with focus on the application of an upper limit on the amount of employer ETPs that receive concessional tax treatment. This has major implications for executives and directors who have ETPs as part of their employment agreements.

The May Budget proposed that from 1 July 2007, termination payments above $140,000 would be taxed at the top 45% tax rate (an increase from the previous rate of 30%). Employer ETPs will be comprised of two components – exempt and taxable. The exempt component will be any post-June 1994 invalidity amount and the pre-July 1983 amount. The taxable component will be the post-June 1983 amount, which will be taxed at 15% for amounts up to $140,000 (indexed) for recipients aged 55 and over and at 30% for those aged under 55. Amounts in excess of $140,000 will be taxed at the top marginal tax rate (plus Medicare levy).

As superannuation benefits paid to those over 60 will be tax free after 1 July 2007, employer ETPs will no longer be able to be rolled over into superannuation, as this would have allowed people to put in place arrangements to circumvent the caps on concessional and post-tax contributions.

The Government on 5 September announced transitional arrangements for individuals with employer ETPs specified in existing employment contracts as at 9 May 2006, provided payment is made prior to 1 July 2012. Amounts will be taxed at 15% up to $140,000 (30 % if under 55), 30% up to $1 million and at the top marginal rate plus Medicare levy for amounts over $1 million.

These employer ETPs can also be rolled into superannuation until 1 July 2012. However, any rolled over amounts above $1 million will have the excess above $1 million taxed at the top marginal tax rate plus Medicare levy. Amounts of less than $1 million will be treated as a taxable contribution to the fund but will not count against the $50,000 cap on concessional contributions.

Contrary to some press articles, we do not think these requirements will provoke a rush of executives and directors for the exit door.

© Guerdon Associates 2024
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