Simpler super - employment termination payments - transitional arrangements

From 1 July 2007, the tax treatment of certain payments made in consequence of the termination of employment (called eligible termination payments until 1 July 2007) will change.

Transitional arrangements may apply to payments made between 1 July 2007 and 30 June 2012 if you were entitled, as at 9 May 2006, to such a payment specified under:

  • a written contract
  • an Australian or foreign law (or an instrument under such a law), or
  • a workplace agreement under the Workplace Relations Act 1996.

These documents must do this by referring to the amount of the payment or a method or formula to work it out. It may allow you to choose how the payment is made – for example, as a payment made in kind, such as shares.

The transitional employment termination arrangements do not apply to employment termination payments made on death.

If the transitional arrangements do not apply to you, refer to Simpler super – employment termination payments (NAT 70643).

Under the changes, an employment termination payment, as it will be called from 1 July 2007, is a lump sum payment made in consequence of the termination of employment. It can include:

  • amounts for unused rostered days off
  • amounts in lieu of notice
  • a gratuity or 'golden handshake'
  • an employee’s invalidity payment (for permanent disability, other than compensation for personal injury), and
  • certain payments after the death of an employee.

Employment termination payments do not include:

  • a payment for unused annual leave or unused long service leave, or
  • the tax-free part of a genuine redundancy payment or an early retirement scheme payment.

 

There are no changes to the tax treatment of these unused leave, redundancy and early retirement payments.

Transitional employment termination payments may be rolled over into super

Transitional termination payments may be:

  • contributed (in full or in part) to a super fund, or
  • used (in full or in part) to buy a super annuity before 1 July 2012.

Transitional employment termination payments that are not rolled over

Any invalidity or pre-July 83 amounts that form part of a transitional employment termination payment are tax free.

The tax on any remaining, taxable component will depend on your age, as shown in the following table.

Recipient’s age

Tax on taxable component of transitional employment termination payments

Under preservation* age on the last day of the income year in which the payment is made
  • Up to $1 million: taxed at a maximum rate of 30%.
  • Amount over $1 million: taxed at the top marginal tax rate plus Medicare levy.

Preservation age* or over on the last day of the income year in which the payment is made
  • Up to $140,000: taxed at a maximum rate of 15%.
  • Amount over $140,000 and up to $1 million: taxed at a maximum rate of 30%.
  • Amount over $1 million: taxed at the top marginal tax rate plus Medicare levy.

*Preservation age is the age at which retirees can access their super benefits.

  • If you were born before 1 July 1960 you can access your super when you are 55.
  • If you were born after 30 June 1960, your preservation age will be between 55 and 60. This is because the preservation age will gradually increase from 55 to 60 between 2015 and 2025.

What are the concessional thresholds for transitional employment termination payments?

The lower threshold of $140,000 in the above table is for the 2007–08 income year and will be indexed annually. The upper cap amount of $1 million is not indexed.

These thresholds apply to the taxable components of all the transitional termination payments you receive during the transitional period, not just those you receive in any one income year. That is, when determining the tax on the taxable component, you must take into account any transitional employment termination payments received during earlier income years in the transitional period. This includes any directed termination payments – see below.

However, these thresholds do not apply to employment termination payments that don’t qualify for the transitional arrangements. That is, when applying the thresholds to transitional employment termination payments you do not need to take into account any employment termination payments that don’t qualify for the transitional arrangements.

What are directed termination payments?

A directed termination payment is a transitional employment termination payment that an individual directs the payer to make to a complying super plan or to purchase a super annuity.

If the recipient chooses a directed termination payment, the payer must comply with the direction and give the recipient the details of how the payment is made up.

When a directed termination payment is made on behalf of an individual, the payment is tax-free to them. However, the payment will be included in the assessable income of the recipient super provider.

More information

To obtain a copy of our publications or for more information:

    Australian Taxation Office
    PO Box 3100
    PENRITH NSW 2740

If you do not speak English well and want to talk to a tax officer, phone the Translating and Interpreting Service on 13 14 50 for help with your call.

If you have a hearing or speech impairment and have access to appropriate TTY or modem equipment, phone 13 36 77. If you do not have access to TTY or modem equipment, phone the Speech to Speech Relay Service on 1300 555 727.

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