There is an additional $180,000 non-indexed whole-of-income cap. This cap will apply with the existing ETP cap rules on some ETPs.
The $180,000 whole-of-income cap is reduced by any other taxable income earned in the income year either before or after receiving the ETP.
Payments included in the whole-of-income cap
The whole-of-income cap only applies to certain ETPs – these are called non-excluded ETPs. Non-excluded ETPs include:
- payments that do not meet the genuine redundancy rules
- payments that do not meet the approved early retirement scheme rules
- golden handshakes
- payment for rostered days off
- payment for unused sick leave
If your payment would have been a genuine redundancy but for the fact you were over 65 or your retirement age, it will not count for the whole-of-income cap.
In some circumstances, a non-excluded payment, such as unused sick leave, may be classified as excluded and be subject to the ETP cap. Your employer needs to categorise each payment as excluded or non-excluded based on the following factors:
- the employment conditions – for example, what is reasonably required to be paid by the employer under the industrial agreement or employment contract for that termination type
- what is paid as extra, discretionary or separate to what is reasonably required for that particular type of termination.
Example 14 shows how a payment for unused sick leave may be classified as an excluded payment. Other non-excluded payments may be classified as excluded in similar circumstances.
How the whole-of-income and ETP caps apply
The whole-of-income cap is reduced by your other income you earn in the income year – for example, salary and wage income, or other income. See Example 2 below to see how this works.
If the whole-of-income cap applies to your payment, your cap amount will be the lesser of either the amount worked out under the whole-of-income cap, or the ETP cap.
Example 2: Applying the whole-of-income cap
Percival is a 61-year-old former commercial pilot who retired from his job in November 2015. His taxable income from his wages in 2015–16 up to that point was $100,000. His employer paid him a termination payment (an ETP) of $50,000, in the form of a gratuity.
Percival’s ETP was a non-excluded ETP, so the lesser of the two caps applied.
His whole-of-income cap was reduced from $180,000 to $80,000 because Percival had earned $100,000 in that income year.
Because Percival’s calculated whole-of-income cap of $80,000 was less than his ETP cap of $195,000 (for 2015–16), the calculated whole-of-income cap was applied to his ETP.
Since Percival’s ETP ($50,000) is less than his calculated whole-of-income cap ($80,000), his entire ETP will be taxed at concessional (lower) tax rates.
Percival has reached his preservation age, so his employer will withhold tax at a rate of 17% from his ETP.
Example 3: Applying the ETP cap
Jim is a 61-year-old forklift operator who retired from his job on 1 July 2015. Because he retired at the start of an income year, he had not received any salary or wage income from his employer – however, his employer paid him a termination payment (an ETP) of $50,000 in the form of a gratuity.
Jim’s ETP was a non-excluded ETP and the lesser of the two caps was applied.
His whole-of-income cap remained at $180,000 because he had no other income.
Because Jim’s ETP cap ($195,000 for 2015–16) was more than his calculated whole-of-income cap, the whole-of-income cap applied to his ETP.
Since Jim’s ETP ($50,000) was less than the whole-of-income cap ($180,000), his entire ETP was taxed at concessional (lower) tax rates.
Jim had reached his preservation age, so his employer withheld tax at a rate of 17% from his ETP.
End of example
If the whole-of-income cap applies to your ETP, your cap will be the lesser of either the ETP cap or the amount worked out under the whole-of-income cap.
Other taxable income for whole-of-income cap
The whole-of-income cap incorporates other taxable income that you earn in the same income year. Other taxable income is simply assessable income minus deductions you are entitled to.
Taxable income includes:
- salary or wage income (including payments for overtime)
- bank interest
- accrued leave you may have been paid when your job was terminated
- taxable component of other employment termination payments received earlier in the same income year – see Example 10.
If you receive a lump sum payment for unused long service leave which accrued before 16 August 1978 (shown at label B on a PAYG payment summary – individual non-business), only 5% of this payment amount is included in other taxable income.
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 the excluded part of a single employment termination payment that is part excluded and part non-excluded – see Examples 13 and 14.
Example 4: Including taxable income in the whole-of-income cap
In August 2015, Tyrone is terminated from his job and receives a $100,000 gratuity and $20,000 for accrued leave.
His employer also paid Tyrone $5,000 in salary for the period 1 July 2015 to date of termination. When working out the tax on Tyrone's ETP of $100,000, his employer calculates his whole-of-income cap as $155,000, being $180,000 minus $25,000 (salary plus accrued leave payment). The calculated whole-of-income cap is less than the ETP cap ($195,000 for 2015–16); and because Tyrone has not reached his preservation age, his employer withholds 32% in tax from the $100,000 ETP, totalling $32,000. Tyrone's employer gives him a PAYG payment summary – employment termination payment showing:
- Total tax withheld: $32,000
- Date of payment: 15 August 2015
- Taxable component: $100,000
- Tax-free component: Nil
- ETP code: O.
Tyrone gets a new job in September 2015 and earns a further $60,000 salary in the 2015–16 income year.
When calculating the tax on Tyrone's ETP at the end of the income year, his taxable income for the purposes of the whole-of-income cap is $85,000 calculated as the sum of:
- $5,000 salary from his first job
- $20,000 accrued leave payment
- $60,000 salary from his second job.
As a result, Tyrone's calculated whole-of-income cap is now $95,000 ($180,000 minus $85,000), which means $5,000 of his $100,000 ETP will be taxed at 49% when he submits his tax return. This is because his whole-of-income cap has been further reduced by the additional $60,000 of taxable income he earned after his August 2015 termination.
Tyrone will need to pay an additional 17% tax on the $5,000 – that is, 49% minus the 32% already withheld by his employer. As a result, Tyrone will have a tax debt of $850.
End of example