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  • Working out the withholding amount

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    An ETP can be made up of a tax-free component and taxable component. You must withhold an amount from the taxable component, including death benefit ETPs.

    Attention

    Do not withhold from the tax-free component of the ETP.

    End of attention

    Find out more

    Information about ETP components, refer to Taxation of termination payments.

    End of find out more

    When a TFN is provided

    If your employee who is receiving an ETP has given you their tax file number (TFN) on a Tax file number declaration (NAT 3092), use table A to work out how much to withhold.

    A Tax file number declaration remains effective until 12 months after you make the last payment to them.

    Attention

    Withholding amounts calculated by applying table A are rounded to the nearest dollar. Results ending in 50 cents are rounded upwards.

    End of attention

    When a TFN has not been provided

    You must withhold 49% from the taxable component of an ETP you make to a resident employee and 47% from a foreign resident employee (ignoring any cents) who has not given you their TFN.

    The examples on this page and following will help you work out how much to withhold.

    Example 1: ETP cap

    Lloyd is an employee of BigBiz Pty Ltd and is 41. His preservation age is 60. He is made redundant from his position at BigBiz and receives an ETP of $45,000.

    The ETP has no tax-free component.

    BigBiz is required to withhold from the ETP. Lloyd has previously provided his TFN to BigBiz and claimed the tax-free threshold.

    BigBiz classifies the payment as a genuine redundancy and using table A, works out that only the ETP cap applies.

    As Lloyd is under preservation age and his entire ETP fits within the ETP cap amount, BigBiz withholds $14,400 from Lloyd’s ETP. This is 32% of Lloyd’s taxable component of $45,000.

    End of example

     

    Example 2: Whole-of-income cap – payment less than cap

    Jane is an employee of SmallBiz Pty Ltd and is 53. Jane’s preservation age is 57 (see Preservation age). Jane resigns from SmallBiz to start a new business.

    Up until Jane’s date of resignation, SmallBiz paid Jane salary and wages totalling $84,000. Under her employment contract, Jane will receive a ‘golden handshake’ of $10,000 from SmallBiz. This payment is an ETP and has a tax-free component of $2,000 (relating to service before July 1983) and a taxable component of $8,000. SmallBiz is required to withhold an amount under the PAYG withholding system. Jane had previously provided her TFN to SmallBiz.

    SmallBiz does not withhold from the tax-free component of $2,000, but must withhold an amount from the taxable component of $8,000.

    SmallBiz classifies the payment as a ‘golden handshake’. Using table A and the following steps, SmallBiz works out which cap to apply and the withholding rate:

    Step

    SmallBiz action

    Result

    1

    Adds up all taxable payments (excluding the ETP) paid to Jane.

    $84,000

    2

    Subtracts the step 1 amount from $180,000. This is the calculated whole-of-income cap.

    $96,000

    3

    Determines the smallest cap by comparing result from step 2 against ETP cap amount of $185,000.

    Whole-of-income cap is smallest

    4

    Uses table A to determine withholding rate on amounts up to calculated whole-of-income cap of $96,000 remembering Jane is under preservation age.

    32%

    5

    Uses table A to determine withholding rate on amounts above the whole-of-income cap of $96,000. As whole $8,000 ETP is under cap, the rate is nil.

    Nil

    SmallBiz withholds $2,560 from Jane’s ETP of $10,000. This is 32% of Jane’s taxable component of $8,000.

    End of example

     

    Example 3: Whole-of-income cap – payment greater than cap

    Chris, aged under preservation age, has his employment terminated by MediumBiz in January. His employment termination does not meet the criteria of a genuine redundancy.

    MediumBiz paid Chris $50,000 in leave entitlements as a lump sum and $50,000 in salary and wages before his termination. In addition to this income, Chris is also paid $120,000 as an ETP comprising of $100,000 taxable component and has a tax free component of $20,000 (relating to service before July 1983).

    As the ETP is not a genuine redundancy, MediumBiz classifies the payment as a ‘golden handshake’. Using table A and the following steps, MediumBiz works out which cap to apply and the withholding rate:

    Step

    MediumBiz action

    Result

    1

    Adds up all taxable payments (excluding the ETP) paid to Chris.

    $100,000

    2

    Subtracts the step 1 amount from $180,000. This is the calculated whole-of-income cap.

    $80,000

    3

    Determines smallest cap by comparing result from step 2 against ETP cap amount of $185,000.

    Whole-of- income cap is smallest

    4

    Uses table A to determine withholding rate on amounts up to calculated whole-of-income cap of $80,000 remembering Chris is under preservation age.

    32%

    5

    Uses table A to determine withholding rate on amounts over the calculated whole-of-income cap of $80,000. ETP $100,000 less cap amount $80,000, gives $20,000 over the cap.

    49%

    MediumBiz withholds $35,400 from Chris’s ETP of $120,000. This is $25,600 ($80,000 x 32%) plus $9,800 ($20,000 x 49%) of Chris’s taxable component of $100,000.

    End of example

     

    Example 4: ETP subject to both ETP cap and whole-of-income cap

    Alec, 30, is made redundant by MacroBiz after 5 years service and receives a termination payment of $65,678 that is part genuine redundancy ($40,678) and part gratuity ($25,000). Until his redundancy, Alec had received $140,000 in salary and wages for the income year.

    In this situation the part of the payment that is subject to the ETP cap only is always dealt with first.

    Alec’s employer calculates the genuine redundancy amount over the tax-free limit* as $7,374. This is an ETP and, using table A, works out that only the ETP cap applies. Alec is under preservation age, so MacroBiz withholds $2,360 (32% of $7,374).

    Using table A and the following steps, MacroBiz then works out which cap to apply and the withholding rate on Alecs’ $25,000 gratuity part of the ETP.

    Step

    MacroBiz action

    Result

    1

    Adds up all taxable payments, salary and wages paid to Alec.

    $140,000

    2

    Subtracts the step 1 amount from $180,000. This is the calculated whole-of-income cap.

    $40,000

    3

    Determines smallest cap by comparing result from step 2 against ETP cap of $177,626 (ETP cap $185,000 for 2014-15 less the $7,374 ETP).

    Whole-of-income cap is smallest

    4

    Uses table A to determine withholding rate on amounts up to calculated whole-of-income cap of $40,000 remembering Alec is under preservation age.

    32%

    5

    Uses table A to determine withholding rate on amounts over the calculated whole-of-income cap of $40,000. As the $25,000 gratuity is under the cap, no further calculation is required.

    Nil

    MacroBiz withholds $2,360 from the $7,374 part of the ETP for genuine redundancy and $8,000 from the $25,000 gratuity part of the ETP. MacroBiz must issue Alec with two separate ETP payment summaries covering each part of the payment.

    * For more information about calculating the tax-free portion of a genuine redundancy payment, refer to Taxation of termination payments

    End of example
    Last modified: 01 Jul 2014QC 39434