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  • Tax-free component of ETPs

    An ETP has a tax-free component if part of the payment relates to:

    The tax-free component may include both of these. The remainder of the ETP is the taxable component.

    You should:

    • record the taxable component and any tax-free component on the employee's ETP payment summary or income statement
    • not withhold from the tax-free component.

    Employment before 1 July 1983

    If part of the ETP relates to employment that occurred before 1 July 1983, the amount to include in the tax-free component is worked out as follows:

    Step 1: Subtract the invalidity part (if any) from the ETP.

    Step 2: Multiply the amount at step 1 by:

    Number of days of employment before 1 July 1983 ÷ total number of days of employment to which the ETP relates.

    Invalidity

    An invalidity segment is part of an ETP that is paid because the employee sustained a permanent disability. It's tax free. An invalidity segment can be paid if:

    • employment ceased as a result of ill health, and
    • two medical practitioners have certified that it is unlikely the employee can ever be gainfully employed in the capacity for which they are reasonably qualified.

    A death benefit ETP can't include an invalidity segment.

    The invalidity segment of the ETP represents the time between the day employment stopped and the day the employee would have retired. It's worked out using the formula below.

    Note that in the formula:

    • 'Days to retirement' are the number of days from the date of termination to the day the employee would have retired. This is generally the day the employee turns 65 or when they would have completed their period of service.
    • 'Employment days' are the number of days of employment up to the date of termination.

    The formula is:

    Amount of ETP × days to retirement ÷ (employment days + days to retirement)

    Example: Employment termination payment with an invalidity segment

    Jackson started work with XYZ Pty Ltd on 1 September 2010. He is no longer able to work on medical grounds, and is terminated on 20 September 2019 due to invalidity. Jackson will turn 65 years old on 24 September 2020. XYZ Pty Ltd pays Jackson an ETP made up of the following:

    • golden handshake $40,000
    • unused rostered days off (RDOs) $2,000
    • unused sick leave $10,000
    • compensation $50,000.

    Because each payment is made for termination due to invalidity, the whole ETP ($102,000) is used to calculate the invalidity segment.

    • $102,000 × [371 ÷ 3,678 (ie 3,307 + 371)] = $10,288

    This $10,288 of the $102,000 is the invalidity segment, which is the tax-free component and the remaining $91,712 is taxable.

    End of example

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    See also:

      Last modified: 04 Jun 2019QC 26218