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Guide to payments on termination of employment and genuine redundancy

1 July 2021

This guide outlines the tax and social security implications of payments made to employees on termination of employment (including genuine redundancy) and the advice opportunities.

Chris Chow, Technical Consultant

Introduction

Upon termination of an employee’s position, an employee may receive several different payments including:

▪ amounts due to a genuine redundancy or early retirement scheme

▪ those classified as employment termination payments, and

▪ unused annual leave and long service leave.

It is necessary to identify the types of payments being made. This is because some payments are specifically excluded from the definition of employment termination payment and are taxed separately. Other factors may also impact the tax implications for each type of payment.

This guide discusses those factors and also examines any available strategies to help manage the impact, including any impact on social security entitlements.

Note: Unless otherwise stated, all further references to ‘genuine redundancy payments’ in this article also refers to payments made under an early retirement scheme.

Table of contents

Employment termination payments ...... 1

Genuine redundancy payments ............ 3

Taxable and tax-free ETP components . 4

Taxation of life benefit ETPs .................. 5

Taxation of death benefit ETPs ............. 8

Unused annual leave and long service leave payments ....................................... 8

Advice opportunities .............................. 9

Employment termination payments

A payment is considered an employment termination payment (ETP) when it is made to:

▪ an employee, in consequence of the termination of their employment (a life benefit ETP), or

▪ another person after an employee’s death, in consequence of the termination of that employee’s job (a death benefit ETP), and

▪ the payment is made within 12 months of the date of termination, and

▪ it is not specifically excluded from being an ETP.

ETPs usually enjoy concessional tax treatment and the applicable rates of tax depend on the:

▪ age of the recipient ▪ taxable income of the recipient, and ▪ the amount of the ETP.

Note: There are different caps that limit the amount of a termination payment that is subject to concessional tax treatment. Refer to the ETP and whole-of-income caps in the ‘Taxation of life benefit ETPs’ section below.

In order to understand the tax implications of payments received, it is necessary to determine whether the payment falls under the definition of an ETP. Certain payments are specifically excluded from being an ETP, such as unused lump sum annual leave (AL) and long service leave (LSL) payments, and are subject to different rates of tax.

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The following table, though not exhaustive, outlines different payments that may be received on termination of employment and distinguishes types of payments that are treated as an ETP for tax purposes, and those that are not.

Table 1: Which payments are ETPs?

Payments included in ETPs Payments not included in ETPs

Unused sick leave or rostered days off Super benefits

Payment in lieu of notice Unused annual leave

Gratuity or ‘golden handshake’ Unused long service leave

Ex gratia payments Foreign termination payments

Genuine redundancy payments or early retirement scheme payments above the tax-free limit

Genuine redundancy payments or early retirement scheme payments within the tax-free limit

Invalidity payments (for permanent disability, other than compensation for personal injury)

Salary, wages, allowances, bonuses and incentives owing to employee for work done or leave already taken

Certain compensation payments from employment disputes

Compensation for personal injury for economic loss

Compensation for loss of job or wrongful dismissal

An advance or a loan

Severance pay Payments deemed to be a dividend

Non-genuine redundancy payments Employee share scheme payments

Payments for loss of future super payments Certain payments for restraint of trade

Lump sum payments paid on the death of an employee

Exemptions from 12-month rule

Generally, an ETP must also be paid within 12 months of termination to be entitled to concessional tax treatment1. If paid outside this timeframe, it is treated as assessable income and taxed at the individual’s marginal tax rate (MTR). An exemption2 will apply if the ATO considers that the late payment is beyond the employee’s control, taking into account the circumstances of each case. Individuals must apply to the ATO requesting it exercise its discretion.

Genuine redundancy and early retirement scheme payments, including amounts above the tax-free limit, are exempt from the 12-month rule.

Exceptions from the 12-month rule also apply to:

▪ payments from a redundancy trust, or ▪ payments made by a liquidator, receiver or trustee in bankruptcy of an entity otherwise liable

to make the payment, where liquidator, receiver or trustee was appointed within 12 months of termination date3.

1 ITAA97 s82-130(1)(b)

2 ITAA97 s82-130(4)

3 ATO guidance: ETP 2018/1 and ETP 2019/1

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Genuine redundancy payments

A genuine redundancy payment is a payment received by an employee due to being dismissed because their position no longer exists and is not being replaced4. This usually results in a larger termination package than if the client voluntarily resigned or retired. This additional amount is the genuine redundancy payment that may be eligible for tax-free treatment.

For a payment to be treated as a genuine redundancy payment, the following conditions must also be satisfied:

▪ the employee is dismissed before the earlier of the following: ­ the day they reach their Age Pension age5, or ­ an earlier mandatory age of retirement or before the end of a particular period of service6

▪ for non-arm’s length dismissals – the payment does not exceed amounts reasonably expected as though it was at arm's length

▪ there was no arrangement in place to employ the employee after their retirement, and ▪ the payment must not be in lieu of superannuation benefits.

Note: ATO Taxation Ruling TR 2009/2 provides a detailed outline of the requirements for a payment to qualify as a genuine redundancy payment and the interaction between the tax treatment of genuine redundancy payments and other termination payments.

Early retirement schemes

An early retirement scheme7 is a scheme undertaken by an employer to change its operations or the nature of the work force by offering certain classes of employees the opportunity to retire early or resign.

Early retirement schemes must be approved by the Commissioner of Taxation in writing before payments are made. An early retirement scheme payment must also satisfy similar conditions described above for a genuine redundancy payment to be eligible for tax-free treatment, including being paid within 12 months.

Tax-free amount of genuine redundancy payments

Once a payment qualifies as a genuine redundancy payment, the calculation of the ‘tax-free amount’ determines how much of the ETP is eligible for tax-free treatment.

The formula for the tax-free amount for a genuine redundancy payment in 2021/22 is as follows:8

Tax-free amount = Base amount + (Service amount x Each completed year of service)

Where:

▪ Base amount = $11,341 ▪ Service amount = $5,672 ▪ Each completed year of service = Number of full years of completed service

(part years of service are not included)

Note: Both figures in the formula above are indexed each year in line with movements in AWOTE.

4 Termination due to voluntary resignation or retirement, or dismissal for not meeting employment standards do not qualify as genuine redundancy.

5 ITAA97 s83-175, age 65 if dismissal occurred prior to 1 July 2019.

6 Any termination payments received upon completion of a fixed term contract will usually not qualify under the tax-free limit.

7 ITAA97 s83-180

8 ITAA97 s83-170

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If the tax-free amount is greater than or equal to the genuine redundancy payment, the entire payment is non-assessable and non-exempt income (ie received tax-free by the employee). Where the tax-free amount is less than the genuine redundancy payment, the tax-free amount is not taxed but the amount in excess of the tax-free amount is taxed as an ETP (refer to ‘Table 2: Taxation of life benefit termination payments’ for ETP tax rates).

Example 1: Tax-free amount less than genuine redundancy payment

Tanya is 42 and is being made redundant after a company merger on 15 April 2022, as her role is no longer required. Tanya has been at the company for over 12 years. As this payment is due to Tanya being genuinely redundant, she is entitled to the tax-free component. The tax-free amount for Tanya is $11,341 + ($5,672 × 12) = $79,405. Tanya received $96,000 in redundancy payment, which exceeds the tax-free amount. As such, $79,405 is received tax-free while $16,595 is taxed as an ETP (see Table 2 for ETP tax rates).

Example 2: Tax-free amount greater than genuine redundancy payment

If Tanya only received a redundancy payment of $48,000, the entire amount is tax-free as it is less than the tax-free amount.

Age limitation

An employee must be less than their Age Pension age9 at the time of dismissal for a redundancy payment to qualify as a genuine redundancy payment10. Where dismissal occurs after Age Pension age:

▪ the employee is not entitled to a tax-free amount of a genuine redundancy payment ▪ the entire payment is taxed as an ETP, and ▪ unused AL and LSL payments are subject to less favourable tax rates.

Advice tip

Where possible, clients being made redundant who are nearing their Age Pension age may want to negotiate an earlier dismissal date with their employer to access the concessional tax treatment for genuine redundancy payments. However, they should also consider the impacts of negotiating an earlier termination, such as foregone salary and superannuation guarantee contributions.

Taxable and tax-free components of ETPs

Once the amount of the ETP is determined, the ETP usually comprises of taxable component only. Under certain circumstances, a tax-free component may exist where:

1. the ETP includes an invalidity segment, or 2. part of the ETP employment period occurred before 1 July 1983 (pre-July 83 segment).

The calculation of the invalidity segment and/or pre-July 83 segment is determined by formulas which are contained in Appendix A – Tax-free component of ETPs. Where a tax-free component exists, the taxable component of the ETP is calculated as:

Taxable component of ETP = Total ETP – tax-free component of ETP

In all cases, the tax-free component of an ETP is non-assessable and non-exempt income (ie not included in assessable income for income tax purposes and not subject to tax).

9 Or another earlier mandatory retirement age. Age pension age is gradually increasing to 67. 10 For terminations that occurred prior to 1 July 2019, employees had to be under age 65 on the date of dismissal for payments to qualify as a genuine redundancy payment.

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Taxation of life benefit ETPs

A life benefit termination payment is a lump sum ETP paid to an employee because of the termination of their employment (excludes termination due to death of the employee). There are two categories of life benefit termination payments, ‘excluded’ and ‘non-excluded’ payments, which impacts the amount of an ETP subject to concessional tax treatment. Excluded payments are subject to the ETP cap only, while non-excluded payments are subject to the ETP cap and the whole-of-income cap.

The following types of life benefit termination payments are excluded payments:11

▪ genuine redundancy payments above the tax-free amount (regardless of eligibility for tax-free amount)

▪ payments for job loss due to invalidity, and ▪ compensation payments due to a genuine employment related dispute relating to personal

injury, harassment, discrimination or unfair dismissal.

Any other ETP that is not treated as an excluded payment are usually non-excluded payments (eg gratuities or golden handshakes, payments in lieu of notice and severance pay).

Table 2: Taxation of life benefit termination payments12

Relevant cap Age at end of financial year Component Cap amounts Tax rate*

ETP cap

Reached preservation age#

Tax-free N/A Tax free

Taxable First $225,000 Up to 17%

Above $225,000 47%

Under preservation age#

Tax-free N/A Tax free

Taxable First $225,000 Up to 32%

Above $225,000 47%

Whole-of-income cap^ Any age

Tax-free N/A Tax free

Taxable Above $180,000 (unindexed)

47%

* Includes 2% Medicare Levy.

^ Applies to non-excluded payments only, after added to other taxable income. # Preservation age is assessed based on their age on the last day of the financial year.

ETP cap amount

The ETP cap13 is the maximum amount of the taxable component of an ETP that a person can receive and be entitled to concessional tax rates.

The rate of tax applicable depends on the ETP recipient’s age on the last day of the financial year. The current ETP cap amount in 2021/22 is $225,00014. However, the ETP cap for a financial year is reduced by the taxable component of:

▪ other ETPs paid earlier in the financial year, and ▪ ETPs paid in previous years if relating to the same termination.

11 ITAA97 s82-10(6) 12 ITAA97 s82-10 13 Although the same figure, the ETP cap is separate from the low rate cap, which only applies to certain lump sum super benefits. The ETP cap is an annual cap whereas the low rate cap is a lifetime cap. 14 Indexed annually to AWOTE, in $5,000 increments if the indexation amount is at least $5,000

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The taxable portion of an ETP is included in assessable income. However, ETPs within the cap receive a tax offset ensuring the rate of income tax paid on the ETP does not exceed the tax rates shown in Table 2. Where a termination payment includes a mixture of excluded and non-excluded payments, excluded payments are applied against the ETP cap first.

This ensures that a person’s ETP cap is not exhausted on the non-excluded payments (which may not get concessional tax treatment under the whole-of-income cap rules discussed below) at the expense of excluded payments (which may receive concessional tax treatment).

Whole-of-income cap

In addition to the ETP cap, the taxable component of non-excluded payments is also subject to a $180,000 whole-of-income cap (non-indexed). This limits the amount of non-excluded ETPs that are eligible for the ETP tax offset.

The whole-of-income cap takes into account other taxable income earned by a client in the financial year, such as employment income, investment income and lump sum unused AL and LSL payments.

The taxable component of a client’s non-excluded ETP being assessed against the whole-of-income cap is then added last15 to an individual’s other taxable income. If this combined amount is equal to or below the whole-of-income cap, it continues to be eligible for the ETP tax offset.

If part or all of the non-excluded ETP added to a client’s other taxable income exceeds the whole- of-income cap in a financial year, the part that is in excess of the cap is taxed at the highest MTR. This part is not eligible for the ETP tax offset, even if there is unused ETP cap remaining.

The whole-of-income cap rules do not apply to excluded payments, the tax-free component of an ETP or the tax-free amount of a genuine redundancy payment.

Advice tip

An employee that finds new employment after termination and earns more taxable income in the same financial year may pay more tax on the ETP from their previous job when they lodge their tax return. This is due to the taxable income earned after termination further reducing the amount of whole-of-income cap available for the ETP.

Note: refer to Appendix B – Taxable income for whole of income cap for a more comprehensive list of what is included in taxable income for the whole of income cap purposes.

Where a client receives multiple ETPs in a financial year, a client’s taxable income also includes the taxable component of ETPs received earlier in the income year, including amounts that are excluded payments if subject to the ETP cap (eg ineligible for tax-free amount). This is because these payments are included in taxable income and subject to tax, but the ETP tax offset ensures the amount of tax paid is limited to the maximum rates of tax applicable in Table 2: Taxation of life benefit termination payments.

15 Revised explanatory memorandum to Tax Laws Amendment (2012 Measures No. 3) Act 2012 (Cth), paragraph 5.11.

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Example 2: ETP comprising excluded payment only

Virgil (age 69) has worked for his employer for 5 years. In 2021/22, his company merges with another and his position is no longer required. Virgil receives a redundancy and is paid $130,000 (100% taxable component). This amount would not have been received if he had voluntarily resigned or retired.

Although his payment does not qualify as a genuine redundancy payment as he is over Age Pension age (and not eligible for a tax-free amount), it is still an excluded payment as it would otherwise have qualified as a genuine redundancy payment.

Virgil has not received any ETPs this financial year, therefore his $130,000 redundancy payment is taxed at a maximum of 17% as it is within the $225,000 ETP cap.

Example 3: ETP comprising non-excluded payment only

Henrique (62) retired from his job in April 2022. In the 2021/22 financial year, Henrique received:

▪ taxable income from wages and investments of $110,000 ▪ unused lump sum annual leave of $10,000, and ▪ an unused sick leave payment of $105,000 (100% taxable ETP).

As the payment relates to an entitlement from voluntary resignation (ie not a genuine redundancy), the unused sick leave is a non-excluded payment and may be subject to the whole-of-income cap.

To work out Henrique’s whole-of-income cap, $180,000 is reduced by Henrique’s other taxable income and unused annual leave for the financial year, excluding the unused sick leave ETP (ie $180,000 - $120,000). This leaves a whole-of-income cap balance of $60,000, which is less than the non-excluded ETP amount, which is therefore subject to the whole-of- income cap.

Henrique is eligible for the ETP tax offset on $60,000, paying a maximum of 17% tax on this amount, and the remaining $45,000 is taxed at 47% (top MTR including Medicare levy).

Example 4: ETP comprising ‘excluded’ and ‘non-excluded’ payments

Going back to the Example 2 with Virgil (age 69), let’s assume the same facts except on top of the $130,000 excluded genuine redundancy payment, he also receives a $65,000 non-excluded termination payment (combined payment of $195,000). He also earned other taxable income of $165,000 in the financial year.

As the ETP comprised excluded and non-excluded payments, the payments are taken to be received in the following order:

▪ excluded payment of $130,000 is received first, and ▪ non-excluded payment of $65,000 is deemed to be received immediately after.

This enables the tax treatment for the separated payments to be determined:

▪ The $225,000 ETP cap amount applies to the excluded payment and the entire $130,000 of the genuine redundancy portion of the ETP attracts the ETP tax offset (maximum tax rate of 17%)

▪ When the $65,000 non-excluded payment is added to his other taxable income of $165,000, this exceeds $180,000 so the amount of ETP tax offset available is limited to the $15,000 remaining under the whole-of-income cap. Hence the first $15,000 of the non-excluded payment attracts the ETP tax offset (maximum tax rate of 17%), while the remaining $50,000 is taxed at 47%.

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Taxation of death benefit ETPs

A death benefit termination payment is a lump sum ETP made by an employer to a deceased employee’s beneficiaries. It is received by a taxpayer after another person’s death, in consequence of the termination of the other person’s employment.

Death benefit ETPs must be received no later than 12 months after the termination to be eligible for concessional ETP tax treatment, though the same exemptions from the 12-month rule detailed on page 2 also apply.

Payments to the trustee of a deceased estate are taxed in the estate. The maximum rate of tax depends on whether the beneficiaries who have benefited, or are expected to benefit, from the payment are dependants or non-dependants of the deceased.

A tax-free component may exist if there is a pre-July 83 segment and is not subject to tax. The taxable component of a death benefit termination payment is subject to the ETP cap amount. The table on the following page outlines the rates of tax applicable.

Note: Refer to Appendix C for a list of dependants and non-dependants.

Table 3: Taxation of death benefit termination payments16

Recipient Component ETP cap amount17 Tax rate*

Tax dependant

Tax-free N/A Tax free

Taxable First $225,000 Nil

Balance over $225,000 45%

Non-tax dependant

Tax-free N/A Tax free

Taxable First $225,000 Up to 30%

Balance over $225,000 45%

* For payments made directly to individuals, 2% Medicare Levy may also apply for non-zero tax rates.

Advice tip

Death benefit termination payments made to a deceased estate and subsequently paid to a beneficiary are not subject to the Medicare levy. This may reduce the tax payable for non-dependants and for ETPs with taxable components exceeding the ETP cap. Furthermore, payments for unused AL and LSL made on the death of an employee to the deceased’s beneficiaries or the trustee of the deceased’s estate are exempt from tax18.

Unused annual leave and long service leave payments

Lump sum unused AL and LSL entitlements are taxable payments when paid on termination of employment but are excluded from being an ETP. Unused AL and LSL payments are subject to different rates of tax to ETPs. The payments may still be eligible for concessional tax treatment depending on date of accrual and the reason for the employee’s termination. The table below outlines the tax rates applicable to lump sum unused AL and LSL payments.

16 ITAA97 Subdivision 82-B.

17 Applicable for 2020/21 financial year and may be indexed in future financial years.

18 ITAA97 s101A(2)

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Table 4: Taxation of lump sum unused AL and LSL payments19

Type of leave Type of termination Date of accrual Maximum tax rate*

Unused annual leave

Voluntary resignation or retirement#

Before 18/08/1993 32%

From 18/08/1993 Marginal tax rate (MTR)

Genuine redundancy, invalidity or early retirement^

Any 32%

Unused long service leave

Voluntary resignation or retirement#

Before 16/08/1978 5% of this payment is taxed at MTR

From 16/08/1978 to 17/08/1993

32%

From 18/08/1993 MTR

Genuine redundancy, invalidity or early retirement^

Before 16/08/1978 5% of this payment is taxed at MTR

From 16/08/1978 32%

* Includes 2% Medicare Levy.

^ Only applies if termination payment satisfies conditions for genuine redundancy, invalidity or early retirement. # These tax rates also apply if genuine redundancy is paid after the individual’s age pension age.

The calculation of unused days is determined by the employer as it is necessary to determine:

▪ the number of days relating to each period, and ▪ adjusting those days for leave taken during that period.

Advice tip

Unused AL and LSL payments are included in assessable income and may affect entitlement to certain tax offsets and concessions such as:

▪ Family Tax Benefit ▪ Government co-contribution ▪ Low Income Tax Offset, and ▪ Senior Australians and Pensioner Tax Offset (SAPTO).

An increase in income may also result in a client being liable for the Division 293 tax (additional 15% tax on concessional contributions).

Advice opportunities

Personal deductible and catch-up concessional contributions

The ability to claim a tax deduction for super contributions may allow many clients to manage tax payable in the same financial year as receiving an ETP. Furthermore, the introduction of catch-up concessional contributions means that some clients are eligible to contribute any unused concessional cap from up to five previous financial years (accrued after 1 July 2018), allowing for greater management of the tax implications of an ETP. However, eligibility for catch-up contribution includes the client having a total superannuation balance below $500,000 on the prior 30 June.

Note: When recommending clients make super contributions, it’s important to remember that the amount is preserved and a condition of release needs to be met to access the money.

19 ITAA97 subdivisions 83-A and 83-B

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Division 293 tax

Care should be taken where a client’s taxable income (including the taxable ETP) plus concessional contributions20 (CCs) will exceed the $250,000 Division 293 threshold. Although personal deductible contributions are not included in taxable income, they are added back under the ‘income for surcharge purposes’21 used for determining liability to pay Division 293 tax. The portion of non-excessive CCs that sit above the $250,000 threshold are subject to an additional 15% tax.

Where a client’s taxable income (including the taxable portion of an ETP) already exceeds $250,000, all non-excessive personal deductible contributions are subject to the additional 15% tax (ie 30% tax in total). This can have undesired tax implications, particularly where the recipient of the ETP has reached preservation age.

Advice tip

Given that some ETPs may be subject to maximum tax rates of 17% where the recipient has reached preservation age, this strategy could potentially cause a client to pay more tax in some circumstances. Clients may also consider making non-concessional contributions if they have surplus cash to boost the tax-free component of their super, though this would have no impact on their tax liability.

Please refer to ‘Guide to concessional contributions’ and ‘Div. 293 tax explained’ available in the Technical section of MLC AdviserOnline for more information on catch-up CCs and Division 293 tax.

Defer taking the payment until preservation age

If a client can delay termination of employment or the payment of a termination payment22 (if employer is happy to oblige) until the financial year that a client will reach preservation age23, there may be tax benefits available.

A client receiving a wholly excluded ETP in the financial year they reach preservation age will pay 15% less tax on the eligible amounts up to the $225,000 ETP cap than a client below preservation age. Remember, the client’s age is based on their age at the end of the financial year and not the date the payment is received.

Clients receiving an ETP comprising of non-excluded payments may also benefit from the 15% tax saving on eligible amounts up to the ETP cap upon reaching preservation age, depending on their level of other taxable income (ignoring the ETP) and their remaining whole-of-income cap.

Defer taking the payment until the new financial year

If a client's income is expected to reduce significantly in the next financial year, there may be a benefit in deferring the termination or receipt of payment until after 1 July if the employer is happy to oblige.21

Some ETP tax rates are maximum rates, which mean that if a client’s MTR in a financial year is lower than the maximum rate, their MTR applies to the payments. Furthermore, the ETP cap is indexed on 1 July each year.

Where a client has less taxable income in the following financial year, this also means more room under the whole-of-income cap. With careful consideration, employees expecting to receive larger non-excluded payments may benefit from this strategy as more of the non-excluded payments may be eligible for the ETP tax offset.

20 Within a client’s relevant CC cap. 21 Income for surcharge purposes for Division 293 includes taxable income, reportable fringe benefits, total net investment losses and low tax contributions. 22 Must be paid within 12 months of termination date to access ETP tax offset unless exemption applies. 23 Preservation age is assessed based on their age on the last day of the financial year.

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Centrelink considerations

Impact of termination payments on Centrelink waiting periods

If a client is considering applying for Centrelink benefits, waiting periods may apply, depending on the support payment. These may include:

▪ an ordinary waiting period ▪ income maintenance period, and/or ▪ liquid assets waiting period.

Clients subject to waiting periods need to ensure they have sufficient funds available to meet ongoing expenses during that time.

Ordinary waiting period

The ordinary waiting period is seven days and applies to JobSeeker Payment, Parenting Payment and Youth Allowance (jobseekers). This waiting period commences from the date of claim and is served in addition to the liquid assets waiting period.

Liquid assets waiting period

The liquid assets waiting period (LAWP) is a period an individual will be ineligible to receive Government income support payments. Liquid assets are readily available assets such as bank accounts, terms deposits, shares and managed funds. The LAWP is a maximum of 13 weeks and applies to:

▪ Jobseeker Payment26 ▪ Youth Allowance and ▪ Austudy payment.

It is measured from the date employment ceased where a person is made redundant. The waiting period (up to maximum period of 13 weeks)24 is calculated as follows:

Liquid assets waiting period = Liquid assets – Maximum reserve amount

$500 (single) or $1,000 (couple)

The maximum reserve amount is:

▪ $5,500 if single with no children, and ▪ $11,000 if a member of couple or family (dependent child).

The full payment amount from the employer (both tax-free and taxable components) are included in liquid assets. The LAWP can be served concurrently with the income maintenance period.

Extension of maximum liquid assets waiting period

The Government has proposed25 to extend the maximum LAWP from 13 to 26 weeks.

Income maintenance period

The income maintenance period (IMP) is the period that people who have received termination or leave payments have these amounts treated as income over an equivalent period.

The lump sum payment is generally divided by the number of weeks that the payment represents and is treated as ordinary income and apportioned evenly across the period covered by the IMP.

24 If LAWP calculated is less than 13 weeks, rounded down to whole number. 25 Social Services Legislation Amendment (Payment Integrity) Bill 2019

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There is no maximum period for the IMP. The IMP applies to:

▪ JobSeeker Payment26 ▪ Parenting Payment ▪ Youth Allowance ▪ Austudy Payment, and ▪ Disability Support Pension.

The gross amount of payments received from the employer is used in the calculation. The IMP can be served concurrently with the LAWP.

Voluntary unemployment – non-payment period

Individuals applying for JobKeeper Payment after leaving employment voluntarily or due to misconduct may need to serve an eight-week non-payment period. This period commences from the date employment ceased and can be served concurrently with other waiting periods.

Assessment of leave payments for pensions not affected by IMP

Where an age pensioner has retired and receives unused leave (such as AL or LSL) paid out as a lump sum, the payment is not treated as employment income for income test purposes. This is due to the employment relationship having ceased and the payment cannot be treated as lump sum employment income, therefore there is no continuing income assessment for such lump sum leave payments.

.

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Appendix A – Tax-free component of ETPs

Invalidity segment

An invalidity segment of an ETP occurs when an employee has their employment terminated, before their last retirement day, due to ill-health and are assessed by two qualified medical practitioners to be unable to return to work in a position they are reasonably qualified because of education, experience or training.

The invalidity segment of an ETP is calculated using the following formula that apportions part of the ETP to the tax-free component.27

Invalidity segment = ETP × Days to retirement / (Employment days + Days to retirement)

Where:

▪ Days to retirement = the number of days from the day on which the person’s employment was terminated to the last retirement day.

▪ Employment days = the number of days of employment to which the payment relates.

Pre-July 83 segment

An ETP includes a pre-July 1983 segment if any of the employment to which the payment relates occurred before 1 July 1983. The pre-July 1983 segment is part of the tax-free component of the ETP and is calculated using the following formula.28

Pre-July 83 segment = (ETP – invalidity segment) ×

Days of employment to which payment relates that occurred before 1/7/83

Total number of days of employment to which payment relates

Appendix B – Taxable income for whole-of-income cap

The whole-of-income cap takes into account other taxable income that the employee earns in the same income year. Other taxable income is simply assessable income minus deductions.

Taxable income includes:

▪ salary or wage income (including payments for overtime) ▪ bank interest ▪ other investment income ▪ bonuses ▪ lump sum unused AL and LSL paid on termination of employment ▪ the taxable component of other ETPs received earlier in the same income year.

Taxable income does not include:

▪ reportable fringe benefits ▪ salary sacrifice items ▪ super guarantee ▪ reportable employer super contributions ▪ reimbursements of work-related expenses ▪ taxable component of excluded part of a single ETP that also includes a non-excluded part.

27 ITAA97 s82-150

28 ITAA97 s82-155

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Appendix C – Dependant for death benefit ETP tax purposes

A dependant of the deceased includes, at the time of their death, any of the following:

▪ a surviving spouse ▪ a former spouse ▪ a child of the deceased who is less than 18 years old ▪ any other person who was financially dependent on the deceased ▪ any person who had an interdependency relationship with the deceased.

Any person other than those described above is considered a non-tax dependant for death benefit ETP purposes and subject a higher rate of tax on amounts within the ETP cap.

Contact details

For further information, please contact MLC Technical Services on 1800 645 597.

Important information and disclaimer

This communication has been prepared by Bridges Financial Services Pty Ltd trading as MLC Advice ABN 60 003 474 977 AFSL 240837, Consultum Financial Advisers Pty Ltd ABN 65 006 373 995 AFSL 245451 (‘Consultum’) and Godfrey Pembroke Group Pty Ltd ABN 38 078 629 973 AFSL 230690 ('GPG'), members of IOOF Holdings Limited ABN 49 100 103 722 ('IOOF') group of companies, registered office Level 6, 161 Collins Street Melbourne VIC 3000, for use and distribution by representatives and authorised representatives of Bridges, Consultum, GPG and Australian Financial Services Licensees with whom an IOOF member has a commercial services agreement. This communication is for adviser use only and must not be provided to clients. Information in this communication is current as at the date of publication. While care has been taken in the preparation of this communication, no liability or responsibility is accepted by IOOF or any of its subsidiaries, or by any agents, officers or employees of IOOF and its subsidiaries, for any loss arising from reliance on this communication. Any opinions expressed constitute our views at the time of issue and are subject to change.