Tax payable on an ETP
The tax payable on an ETP depends on your age when your employment is terminated. If you have reached preservation age in the income year your employment is terminated, a maximum tax rate of 17% applies up to a cap amount. If you have not reached preservation age in the income year, a maximum tax rate of 32% applies to the ETP up to a cap amount. This is referred to as receiving concessional tax treatment, or being eligible for the ETP tax offset. The amount above the cap, regardless of your age, is taxed at the highest marginal tax rate of 49%.
Note: A temporary 2% levy applies for the 2014-15, 2015-16 and 2016-17 income years to individuals with a taxable income of more than $180,000 per year. The levy is payable at a rate of 2% of each dollar of a taxpayer's taxable income over $180,000. This will cease to apply from 1 July 2017.
Example 1: Employment termination payment with an invalidity segment
Jackson started work with XYZ Pty Ltd on 1 September 2007. He is no longer able to work on medical grounds, and is terminated on 20 September 2015 due to invalidity. Jackson will turn 65 years old on 25 September 2016. XYZ Pty Ltd is going to pay Jackson an ETP that is made up of the following payments:
- 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.
XYZ applies the invalidity formula to determine the invalidity segment:
$102,000 x [371/ 3,313 (i.e. 2,942 + 371)] = $11,422
$11,422 of the $102,000 is the invalidity segment, which is the tax-free component, and the remaining $90,578 is the taxable component. The ETP cap (only) applies to the payment and, because it is all below the cap ($195,000 for 2015–16), it is taxed at a lower tax rate. Because Jackson is above preservation age, XYZ calculates the withholding amount as $15,398 (17% of $90,578) and issues Jackson an ETP payment summary with the following information:
End of example
- Total tax withheld: $15,398
- Date of payment: 20 September 2015
- Taxable component: $90,578
- Tax-free component: $11,422
- ETP code: R.