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  • Working out the withholding amount

    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.

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

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

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

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

    If the payment is to be made to a foreign resident you will need to check if there is a tax treaty with their country of residence. The full list of our tax treaties is maintained by Treasury and can be found at Australian Tax TreatiesExternal Link. If the ETP is assessable only in the other country because of the treaty, then no withholding is required.

    If a foreign resident's ETP is assessable in Australia, you are required to withhold from the payment. Adjust the rates set out in table A to exclude the Medicare levy of 2%.

    Find out about:

    When a TFN has not been provided

    You must withhold 47% from the taxable component of an ETP you make to a resident employee and 45% from a foreign resident employee (ignoring any cents) who has not given you their TFN.

    Examples

    Example 1: ETP cap

    Lloyd is an employee of BigBiz Pty Ltd and is 41 years old. 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 50 years old. Jane’s preservation age is 60. 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 $205,000.

    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, no further calculation is required.

    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 is younger than his preservation age. He 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 $130,000 as an ETP comprising of a $100,000 taxable component and has a tax free component of $30,000 (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 $205,000.

    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. An ETP of $100,000 less the cap amount $80,000 gives $20,000 over the cap.

    47%

    MediumBiz withholds $35,000 from Chris’s ETP of $130,000. This is $25,600 ($80,000 × 32%) plus $9,400 ($20,000 × 47%) 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 of 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 limit2 as $4,279. This is calculated as follows:

    $40,678 less $36,399 due to the 5 years of service [$10,399 base limit plus $26,000 (5 × $5,200)]. The amount of $4,279 is an ETP.

    Using table A, his employer works out that only the ETP cap applies. Alec is under preservation age, so MacroBiz withholds $1,369 (32% of $4,279).

    Using table A and the following steps, MacroBiz then works out which cap to apply and the withholding rate on Alec's $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 $200,721 (ETP cap $205,000 for 2018–19 less the $4,279 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 $1,369 from the $4,279 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.

    2 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: 14 Jun 2019QC 55466