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Taxation of life benefit ETPsA life benefit termination payment is a lump sum ETP paid to an employee because of the terminationof their employment (excludes termination due to death of the employee). There are two categories oflife benefit termination payments, ‘excluded’ and ‘non-excluded’ payments, which impacts the amountof 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 fortax-free amount) payments for job loss due to invalidity, and compensation payments due to a genuine employment related dispute relating to personalinjury, 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 payments12Relevant capAge at end of financial yearReached preservation age#ComponentCap amountsTax rate*Tax-freeN/ATax freeTaxableFirst 225,000Up to 17%Above 225,00047%Tax-freeN/ATax freeTaxableFirst 225,000Up to 32%Above 225,00047%Tax-freeN/ATax freeTaxableAbove 180,000(unindexed)47%ETP capUnder preservation age#Whole-of-incomecap Any age* 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 amountThe ETP cap13 is the maximum amount of the taxable component of an ETP that a person canreceive 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 yearis 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 s82-1013 Although the same figure, the ETP cap is separate from the low rate cap, which only applies to certain lump sumsuper 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 5,0005

The taxable portion of an ETP is included in assessable income. However, ETPs within the capreceive a tax offset ensuring the rate of income tax paid on the ETP does not exceed the taxrates shown in Table 2. Where a termination payment includes a mixture of excluded and nonexcluded 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 (whichmay 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 capIn addition to the ETP cap, the taxable component of non-excluded payments is also subject toa 180,000 whole-of-income cap (non-indexed). This limits the amount of non-excluded ETPsthat are eligible for the ETP tax offset.The whole-of-income cap takes into account other taxable income earned by a client in the financialyear, 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-incomecap is then added last15 to an individual’s other taxable income. If this combined amount is equal toor 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 wholeof-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 anETP or the tax-free amount of a genuine redundancy payment. Advice tipAn employee that finds new employment after termination and earns more taxable income in thesame financial year may pay more tax on the ETP from their previous job when they lodge theirtax return. This is due to the taxable income earned after termination further reducing the amountof 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 ofwhat 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 includesthe taxable component of ETPs received earlier in the income year, including amounts that areexcluded payments if subject to the ETP cap (eg ineligible for tax-free amount). This is becausethese payments are included in taxable income and subject to tax, but the ETP tax offset ensuresthe amount of tax paid is limited to the maximum rates of tax applicable in Table 2: Taxation of lifebenefit termination payments.15 Revised explanatory memorandum to Tax Laws Amendment (2012 Measures No. 3) Act 2012 (Cth), paragraph 5.11.6

Example 2: ETP comprising excluded payment onlyVirgil (age 69) has worked for his employer for 5 years. In 2021/22, his company mergeswith 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 hadvoluntarily resigned or retired.Although his payment does not qualify as a genuine redundancy payment as he is overAge Pension age (and not eligible for a tax-free amount), it is still an excluded paymentas it would otherwise have qualified as a genuine redundancy payment.Virgil has not received any ETPs this financial year, therefore his 130,000 redundancypayment is taxed at a maximum of 17% as it is within the 225,000 ETP cap.Example 3: ETP comprising non-excluded payment onlyHenrique (62) retired from his job in April 2022. In the 2021/22 financial year,Henrique received: taxable income from wages and investments of 110,000unused lump sum annual leave of 10,000, andan unused sick leave payment of 105,000 (100% taxable ETP).As the payment relates to an entitlement from voluntary resignation (ie not a genuineredundancy), the unused sick leave is a non-excluded payment and may be subject tothe whole-of-income cap.To work out Henrique’s whole-of-income cap, 180,000 is reduced by Henrique’s othertaxable income and unused annual leave for the financial year, excluding the unused sickleave 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-ofincome 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 includingMedicare levy).Example 4: ETP comprising ‘excluded’ and ‘non-excluded’ paymentsGoing back to the Example 2 with Virgil (age 69), let’s assume the same facts except ontop of the 130,000 excluded genuine redundancy payment, he also receives a 65,000non-excluded termination payment (combined payment of 195,000). He also earned othertaxable income of 165,000 in the financial year.As the ETP comprised excluded and non-excluded payments, the payments are taken to bereceived in the following order: excluded payment of 130,000 is received first, andnon-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 130,000of the genuine redundancy portion of the ETP attracts the ETP tax offset (maximum taxrate 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 15,000remaining under the whole-of-income cap. Hence the first 15,000 of the non-excludedpayment attracts the ETP tax offset (maximum tax rate of 17%), while the remaining 50,000 is taxed at 47%.7

Taxation of death benefit ETPsA death benefit termination payment is a lump sum ETP made by an employer to a deceasedemployee’s beneficiaries. It is received by a taxpayer after another person’s death, in consequenceof the termination of the other person’s employment.Death benefit ETPs must be received no later than 12 months after the termination to be eligiblefor concessional ETP tax treatment, though the same exemptions from the 12-month rule detailedon page 2 also apply.Payments to the trustee of a deceased estate are taxed in the estate. The maximum rate of taxdepends on whether the beneficiaries who have benefited, or are expected to benefit, from thepayment 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 capamount. 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 payments16RecipientComponentETP cap amount17Tax rate*Tax-freeN/ATax freeFirst 225,000NilBalance over 225,00045%N/ATax freeFirst 225,000Up to 30%Balance over 225,00045%Tax dependantTaxableTax-freeNon-tax dependantTaxable* For payments made directly to individuals, 2% Medicare Levy may also apply for non-zero tax rates. Advice tipDeath benefit termination payments made to a deceased estate and subsequently paidto a beneficiary are not subject to the Medicare levy. This may reduce the tax payable fornon-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’sbeneficiaries or the trustee of the deceased’s estate are exempt from tax18.Unused annual leave and long service leave paymentsLump sum unused AL and LSL entitlements are taxable payments when paid on termination ofemployment but are excluded from being an ETP. Unused AL and LSL payments are subject todifferent rates of tax to ETPs. The payments may still be eligible for concessional tax treatmentdepending on date of accrual and the reason for the employee’s termination. The table belowoutlines 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)8

Table 4: Taxation of lump sum unused AL and LSL payments19Type of leaveUnusedannualleaveUnusedlong serviceleaveType of terminationDate of accrualMaximum tax rate*Voluntary resignationor retirement#Before 18/08/199332%From 18/08/1993Marginal tax rate (MTR)Any32%Before 16/08/19785% of this payment istaxed at MTRFrom 16/08/1978 to17/08/199332%From 18/08/1993MTRBefore 16/08/19785% of this payment istaxed at MTRFrom 16/08/197832%Genuine redundancy,invalidity or earlyretirement Voluntary resignationor retirement#Genuine redundancy,invalidity or earlyretirement * 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 tipUnused AL and LSL payments are included in assessable income and may affect entitlementto 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 (additional15% tax on concessional contributions).Advice opportunitiesPersonal deductible and catch-up concessional contributionsThe ability to claim a tax deduction for super contributions may allow many clients to managetax payable in the same financial year as receiving an ETP. Furthermore, the introduction ofcatch-up concessional contributions means that some clients are eligible to contribute any unusedconcessional cap from up to five previous financial years (accrued after 1 July 2018), allowing forgreater management of the tax implications of an ETP. However, eligibility for catch-up contributionincludes 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 amountis preserved and a condition of release needs to be met to access the money.19 ITAA97 subdivisions 83-A and 83-B9

Division 293 taxCare should be taken where a client’s taxable income (including the taxable ETP) plus concessionalcontributions20 (CCs) will exceed the 250,000 Division 293 threshold. Although personal deductiblecontributions are not included in taxable income, they are added back under the ‘income forsurcharge purposes’21 used for determining liability to pay Division 293 tax. The portion of nonexcessive 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% taxin total). This can have undesired tax implications, particularly where the recipient of the ETP hasreached preservation age. Advice tipGiven that some ETPs may be subject to maximum tax rates of 17% where the recipient hasreached preservation age, this strategy could potentially cause a client to pay more tax in somecircumstances. Clients may also consider making non-concessional contributions if they havesurplus cash to boost the tax-free component of their super, though this would have no impacton their tax liability.Please refer to ‘Guide to concessional contributions’ and ‘Div. 293 tax explained’ availablein the Technical section of MLC AdviserOnline for more information on catch-up CCs and Division293 tax.Defer taking the payment until preservation ageIf a client can delay termination of employment or the payment of a termination payment 22(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 pay15% less tax on the eligible amounts up to the 225,000 ETP cap than a client below preservationage. Remember, the client’s age is based on their age at the end of the financial year and not thedate the payment is received.Clients receiving an ETP comprising of non-excluded payments may also benefit from the 15% taxsaving on eligible amounts up to the ETP cap upon reaching preservation age, depending on theirlevel of other taxable income (ignoring the ETP) and their remaining whole-of-income cap.Defer taking the payment until the new financial yearIf a client's income is expected to reduce significantly in the next financial year, there may be a benefitin deferring the termination or receipt of payment until after 1 July if the employer is happy to oblige.21Some ETP tax rates are maximum rates, which mean that if a client’s MTR in a financial year is lowerthan the maximum rate, their MTR applies to the payments. Furthermore, the ETP cap is indexed on1 July each year.Where a client has less taxable income in the following financial year, this also means more roomunder the whole-of-income cap. With careful consideration, employees expecting to receive largernon-excluded payments may benefit from this strategy as more of the non-excluded payments maybe 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 netinvestment 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.10

Centrelink considerationsImpact of termination payments on Centrelink waiting periodsIf a client is considering applying for Centrelink benefits, waiting periods may apply, depending onthe 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 ongoingexpenses during that time.Ordinary waiting periodThe ordinary waiting period is seven days and applies to JobSeeker Payment, Parenting Paymentand Youth Allowance (jobseekers). This waiting period commences from the date of claim and isserved in addition to the liquid assets waiting period.Liquid assets waiting periodThe liquid assets waiting period (LAWP) is a period an individual will be ineligible to receiveGovernment income support payments. Liquid assets are readily available assets such as bankaccounts, terms deposits, shares and managed funds. The LAWP is a maximum of 13 weeksand applies to: Jobseeker Payment26 Youth Allowance and Austudy payment.It is measured from the date employment ceased where a person is made redundant. The waitingperiod (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 includedin liquid assets. The LAWP can be served concurrently with the income maintenance period.Extension of maximum liquid assets waiting periodThe Government has proposed25 to extend the maximum LAWP from 13 to 26 weeks.Income maintenance periodThe income maintenance period (IMP) is the period that people who have received terminationor 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 representsand 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 201911

There is no maximum period for the IMP. The IMP applies to: JobSeeker Payment26Parenting PaymentYouth AllowanceAustudy Payment, andDisability Support Pension.The gross amount of payments received f

4 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