### Multiple ETPs

The ETP cap reduces each time you receive a life benefit ETP, related to the same termination even if multiple payments are received over different income years. This prevents splitting payments to avoid the ETP cap.

The ETP cap also reduces for any ETP received in the same income year and this is regardless of whether the payment is from the same termination or a different termination.

Example 11: Multiple ETPs

Lloyd's employment is terminated in June 2015 and he receives a \$100,000 ETP. His final entitlements are calculated and a second payment is made in August 2015 of another \$100,000 ETP. Assume both payments are excluded payments. The first payment is less than the ETP cap but the second payment exceeds the cap because, even though Lloyd received his first payment in the 2014–15 income year, it is an excluded payment relating to the same termination and will reduce Lloyd's ETP cap in 2015–16.

• First ETP paid in 2014–15 = \$100,000.
• Second ETP paid in 2015–16 = \$100,000.

Lloyd’s ETP cap in 2015–16 is only \$85,000 because it is reduced by the earlier ETP – that is, \$185,000 minus \$100,000.

As a result, \$15,000 – that is, \$100,000 minus \$85,000 – will be more than the reduced ETP cap, and taxed at the highest rate of 49%.

End of example

The whole-of-income cap only applies on a year-by-year basis – that is, the \$180,000 is not reduced by any ETPs you received in earlier years. However, the whole-of-income cap can be reduced by excluded or non-excluded ETPs received earlier in the same income year – see Example 10.

### Tax losses and the whole-of-income cap

Tax losses will not be taken into account in working out your whole-of-income cap.

Example 12: ETPs and tax losses

Mike retires on 1 July 2015 and receives a non-excluded ETP of \$200,000.

Mike has some negatively geared investments and has a tax loss of \$20,000 and a nil taxable income (not including ETPs) in 2015–16.

Mike’s whole-of-income cap is \$180,000 because his taxable income is nil. Mike is eligible for concessional tax treatment on \$180,000 because the whole-of-income cap is lesser than the ETP cap of \$195,000 (for 2015–16).

End of example

### Single ETP consisting of excluded and non-excluded parts

A single ETP may contain an excluded part (for example, genuine redundancy payment) and non-excluded part (for example, gratuity). The excluded part is taken into account first, and the non-excluded part second. The ETP cap amount will apply to the excluded part, and the lesser of the remaining ETP cap and whole-of-income cap will apply to the non-excluded part. When calculating the whole-of-income cap for the non-excluded part, the taxable income does not include the taxable component of the excluded part.

Your employer will need to issue two ETP payment summaries:

• a payment summary to cover the excluded part
• a payment summary to cover the non-excluded part.

Example 13: Single ETP with excluded and non-excluded parts

Robyn received a single termination payment of \$170,000 in 2015–16. This consisted of two parts – a \$50,000 gratuity that is non-excluded (subject to the lesser of the whole-of-income cap or ETP cap); and \$120,000 compensation for unfair dismissal that is excluded (subject to the ETP cap only). Robyn also earned \$20,000 in salary and wages.

Even though the two ETP components were part of the one payment, Robyn's excluded payment is taken as being received first. The entire \$120,000 of her compensation payment is an excluded payment and will be taxed at a concessional rate because it is less than the ETP cap. The remaining balance of the ETP cap is \$65,000 (\$195,000 for 2015–16, minus \$120,000).

The gratuity part of Robyn’s ETP will be subject to the lesser of the two caps. Robyn’s whole-of-income cap is \$180,000 reduced by her \$20,000 salary – this means Robyn's whole-of-income cap is \$160,000.

Because Robyn's ETP cap (\$65,000) is the lesser of the two caps, it will apply to her \$50,000 gratuity. As a result, all of Robyn's gratuity will receive concessional tax treatment – that is, the ETP tax offset.

In total, Robyn is eligible for the ETP tax offset on her entire \$170,000 termination payment.

Example 14: Single ETP with excluded (genuine redundancy) and
non-excluded payments and unused leave payments

After five years service, Alec, who is 30 years old, is made redundant from his place of work and receives the following payments in his termination pay:

• redundancy pay – \$34,500.00
• unused sick leave – \$6,178.50
• payment in lieu of notice – \$1,723.42
• unused annual leave – \$5,234.17
• unused long service leave – \$11,423.91
• gratuity – \$25,000.00.

Under Alec's workplace agreement, payment in lieu of notice, and the gratuity, are payable on termination of employment – this means they are paid for any type of departure, including voluntary termination. Alec's employer has contacted us and has confirmed that his redundancy meets the conditions of a genuine redundancy – this means the redundancy payment and unused sick leave payment are in excess of what was reasonably expected to be paid for a voluntary termination.

The redundancy pay and unused sick leave payment are excluded payments and the ETP cap only applies. The payment in lieu of notice and gratuity are non-excluded payments, and the lesser of the ETP cap or whole-of-income cap applies.

Alec had previously received \$140,000 in other taxable payments (salary and wage income) during the income year.

His termination pay will be taxed as follows:

Step

Action

Result

1

Calculate the genuine redundancy payment

The redundancy payment and unused sick leave qualify as genuine redundancy: \$34,500 + \$6,178

\$40,678

2

Calculate the tax-free limit on the genuine redundancy payment

The tax-free amount in 2015–16 is \$9,780 + \$4,891 for each completed year of service. Alec has five years of completed service: \$9,780 + (5 x \$4,891)

Note: The result is shown at label D on a PAYG payment summary – individual non-business (NAT 0046).

\$34,235

3

Calculate the taxable component of the genuine redundancy part of the payment

This is the genuine redundancy payment from step 1 minus the tax-free limit amount from step 2: \$40,678 – \$34,235

Note: The result is shown at taxable component on a PAYG payment summary — employment termination payment with ETP code R. Because this part of the termination payment is an excluded payment, only the ETP cap applies. Alec is under the preservation age and the excluded payment of \$6,443 will be taxed at 32%.

\$6,443

ETP code R

4

Calculate the remaining ETP cap

This amount is the ETP cap (\$195,000 for 2015–16) minus the taxable component of the excluded payment (from step 3): \$195,000 – \$6,443

\$188,557

5

Calculate non-excluded payment

The non-excluded part of the termination payment is the payment in lieu of notice and the gratuity: \$1,723 + \$25,000

Note: The result is shown at taxable component on a separate PAYG payment summary – employment termination payment with ETP code O.

\$26,723

ETP code O

6

Calculate the whole-of-income cap

This is the whole-of-income cap (\$180,000) minus other taxable income: \$180,000 – \$140,000 (salary and wage income) = \$40,000

This amount is further reduced by the taxable payments for unused annual and long service leave: \$40,000 – \$16,657 = \$23,343

The whole-of-income cap is not reduced by the excluded part of the termination payment in this case because it was received at the same time as the non-excluded payment – that is, it was not received earlier in the income year.

\$23,343

(Calculated whole-of-income cap)

7

Determine the lower of the ETP caps

Alec will receive the lower of the remaining ETP cap or the whole-of-income cap:

Remaining ETP cap (from step 4) \$188,557

Calculated whole-of-income cap (from step 6) \$23,343

The whole-of-income cap will apply to Alec’s non-excluded payment because the cap is lower than the remaining ETP cap.

\$23,343

(Calculated whole-of-income cap is the lower cap)

8

Apply the calculated whole-of-income cap to non-excluded payment

Non-excluded payment less calculated whole-of-income cap: \$26,723 – \$23,343 = \$3,380. So, only \$23,343 of the non-excluded part of the ETP will be below the whole-of-income cap and will be taxed concessionally at 32%.

The remaining \$3,380 is above the whole-of-income cap and will be taxed at 49%.

\$23,343 taxed at 32%

\$3,380 taxed at 49%

Alec's payments for unused annual and long service leave totalling \$16,657 are taxed separately using the Tax table for unused leave payments on termination of employment.

End of example

For more information on unused leave on termination, refer to Tax table for unused leave payments on termination of employment (NAT 3351)