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Ruling

Subject: Genuine redundancy payment - Dual capacity role

Question

Is a portion of the payment to be made to your client, a tax-free part of a genuine redundancy payment (GRP) in accordance with section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answer

Yes.

This ruling applies for the following period

For the year ended 30 June 2012

For the year ending 30 June 2013

The scheme commenced on

1 July 2011

Relevant facts

Early in the 1980's your client commenced employment with Company A and became a Director approximately a decade later.

During the early 1990's, Company A merged with other offices to form Company B. The name was later changed to Company C.

In a Service Agreement between your client and Company B, made at the time of the merger, your client's appointment as an employee and Director of the company is confirmed.

Your client is the Resident Director of a specified regional office of Company C and is responsible for the complete running of the office and its profitability, reporting to the Board of Directors.

In a meeting held in early 2011, with the Board of Directors of Company C, it was agreed that your client's position as Resident Director was to be made redundant effective at the end of the third quarter of the 2010-11 income year. Your client would continue as an employee until the first quarter of the 2011-12 income year and receive a payment to be paid within 12 months of your client's departure.

The company's Managing Director advised that your client's position of Resident Director of the specified regional office has been made redundant due to the continuing downturn in current market conditions resulting from the Global Financial Crisis and as your client had contributed a specified number of years employment with the company.

On termination of employment your client will receive entitlements of unused annual leave, unused long service leave and a payment of a specified amount which relates to your client's employment.

You have advised that half of the payment will be made to your client on the termination of their employment in the first quarter of the 2011-12 income year, with the remaining amount being made during the first quarter of the 2012-13 income year. The reason for the two instalments is due to the company's cash flow issue of not being able to pay straight away. Therefore two instalments will be made within 12 months of your client's termination of employment.

You have advised the amount of your client's current annual salary package.

Your client's position of Resident Director of the specified regional office is redundant and will not be replaced. However, one of the Directors from another nearby office will be supervising the specified regional office, generally visiting once per week.

No other staff member of the specified regional office will be promoted to your client's former position.

There will not be any future employment between your client and Company C after your client's termination of employment.

You have advised that your client held a dual capacity role and, as a Director, was present in the board meeting. However, your client left the room whilst this matter was discussed and abstained from voting on the resolution. It was resolved to make your client's dual positions redundant.

Your client was left with no choice with respect to the redundancy - both practically, being only one of a number of directors at the time of the meeting; and also morally (even legally, in accordance with your client's Corporations Law responsibilities as a director), given that the financial performance of the specified regional office no longer justified the position of a resident director.

You are of the opinion that your client's termination of employment is due to genuine redundancy in accordance with section 83-175 of the ITAA 1997 and further outlined in paragraphs 79 to 94 of Taxation Ruling TR 2009-2 which refer to dual capacity employees.

The company's Managing Director has advised that your client's termination of employment was not on account of any personal act or default. Furthermore, the termination payment was due to their (the Company's) breach of your client's service agreement and taking into account your client's number of years of service with the company and your client's executive salary.

There was no date prior to your client's sixty fifth birthday when your client was required to cease employment.

No part of the employment termination payment was not made to your client in lieu of superannuation benefits.

Your client is an equity holder directly and through a family trust, holding a specified percentage of equity in the Company.

Your client is over the age of 55 years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 2-40.

Income Tax Assessment Act 1936 Section 27F.

Income Tax Assessment Act 1997 Section 82-10(2).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Section 83-170.

Income Tax Assessment Act 1997 Subsection 83-170(2).

Income Tax Assessment Act 1997 Subsection 83-170(3).

Income Tax Assessment Act 1997 Section 83-175.

Income Tax Assessment Act 1997 Subsection 83-175(1).

Income Tax Assessment Act 1997 Subsection 83-175(2).

Income Tax Assessment Act 1997 Paragraph 83-175(2)(a).

Income Tax Assessment Act 1997 Paragraph 83-175(2)(b).

Income Tax Assessment Act 1997 Paragraph 83-175(2)(c).

Income Tax Assessment Act 1997 Subsection 83-175(3).

Income Tax Assessment Act 1997 Subsection 83-175(4).

Reasons for decision

Summary

A portion of the payment is considered to be a genuine redundancy payment as all the necessary conditions have been satisfied.

The portion of the payments in excess of the tax-free amount are the taxable components of employment termination payments and are to be included in your client's assessable income for the 2011-12 and 2012-13 income years.

As the tax-free amount has been reached in the 2011-12 income year, the total amount of the 2^nd instalment of the payment to be made to your client in the 2012-13 income year is the taxable component of an employment termination payment and the total amount is to be included in your client's assessable income in the year it is received.

Detailed reasoning

To determine if any part of the employment termination payment being made to your client from Company C constitutes a genuine redundancy payment (GRP), all the conditions in section 83-175 of the ITAA 1997 will need to be satisfied.

Genuine redundancy payment

Section 83-175 of the ITAA 1997 states:

(1) A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee's position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of dismissal.

(2) A genuine redundancy payment must satisfy the following conditions:

(a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service the day he or she would reach the age or complete the period of service (as the case may be);

(b) if the dismissal was not at arm's length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm's length;

(c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after dismissal.

(3) However, a genuine redundancy payment does not include any part of a payment that was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later time.

Payments not covered

(4) A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

The Commissioner has issued Taxation Ruling 2009/2, Income Tax: genuine redundancy payments (TR 2009/2). The Ruling provides guidance on the factors to be considered in the interpretation of section 83-175 of the ITAA 1997.

In discussing what constitutes a GRP in accordance with subsection 83-175(1) of the ITAA 1997, paragraph 11 of TR 2009/2 states:

There are four necessary components within this requirement:

· The payment being tested must be received in consequence of an employee's termination.

· That termination must involve an employee being dismissed from employment.

· That dismissal must be caused by the redundancy of the employee's position.

· The redundancy payment must be made genuinely because of a redundancy.

Payment is made in consequence of an employee's termination

In Taxation Ruling TR 2003/13 the Commissioner considered the meaning of the phrase in consequence of as interpreted by the Courts.

In paragraph 5 of TR 2003/13 the Commissioner states:

A payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment follows as an effect or result of the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

As further stated by the Commissioner in paragraph 6 of TR 2003/13, there must be:

A causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In Reseck v. Federal Commissioner of Taxation (1975) 49 ALJR 370; (1975) 6 ALR 642; (1975) 5 ATR 538; (1975) 75 ATC 4213; (1975) 133 CLR 45 (Reseck) Justice Gibbs stated:

Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination. It is not my opinion necessary that the termination of the services should be the dominant cause of the payment.

While Justice Jacobs, in the same case, stated:

It was submitted that the words in consequence of import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a following on.

In looking at the phrase in consequence of the Full Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557; (1979) 10 ATR 13; (1979) 45 FLR 279; (1979) 79 ATC 4325 (McIntosh) considered the decision in Reseck. In doing so the Full Federal Court emphasised that a payment may be in consequence of the termination of employment even though the termination is not the dominant cause of the payment.

Suffice it to say that both Courts views were that for a payment to be made in consequence of the termination of employment it had to follow on as a result or effect of the termination of employment. Additionally, while it is not necessary to show that termination of employment is the sole or dominant cause, a temporal sequence alone would not be sufficient.

The phrase in consequence of and the decisions in Reseck and McIntosh were considered more recently by the Federal Court in Le Grand v Federal Commissioner of Taxation [2002] FCA 1258; (2002) 124 FCR 53; (2002) 195 ALR 194; (2002) 2002 ATC 4907; (2002) 51 ATR 39 (Le Grand), where Justice Goldberg stated:

I am satisfied that there is a sufficient connection between the termination of the applicants employment and the payment to warrant the finding that the payment was made in consequence of the termination of the applicants employment. I am satisfied that the payment was an effect or result of that termination in the sense that there was a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment.

Justice Goldberg concluded that the test for determining when a payment is made in consequence of the termination of employment is that which was articulated by Justice Gibbs in Reseck. Thus, for the payment to have been made in consequence of the termination of employment, the payment must follow as an effect or result of the termination of employment. As noted in both paragraphs 6 and 28 of TR 2003/13, there must be 'a causal connection between the termination and the payment even though the termination need not be the sole or dominant cause of the payment'.

Therefore, if the payment follows as an effect or a result from the termination of employment, the payment will be made in consequence of the termination of employment.

In this case, it is evident that the payments to be made to your client will be made in consequence of the termination of your client's employment. The payments would not be made if there was no termination of employment. The termination of employment and the payments are all intertwined and connected. If not for the termination of employment, the issue of paying a lump sum would not have arisen.

Dismissal and Redundancy

Section 83-175 of the ITAA 1997 replaces former section 27F of the Income Tax Assessment Act 1936 (ITAA 1936), and is written using a number of the same terms and concepts. GRPs were previously known as bona fide redundancy payments (BFRP).

The Explanatory Memorandum to the Income Tax Assessment Amendment Bill (No.3) 1984 which, as enacted, inserted former section 27F into the ITAA 1936 states at page 91:

The terms "dismissal" and "redundancy" are not defined in the legislation and, therefore, should be given their ordinary meanings. "Dismissal" carries with it the concept of the involuntary (on the taxpayer's part) termination of employment. "Redundancy" carries the concept that the requirements of the employer for employees to carry out work of a particular kind, or for employees to carry out work of a particular kind in the place where they were so employed, have ceased or diminished or are expected to cease or diminish. Redundancy, however, would not extend to the dismissal of an employee for personal or disciplinary reasons or for reasons that the employee was inefficient.

Consequently, it is necessary to consider the ordinary meaning of the terms 'dismissal' and 'redundancy' and the meaning the judicial authorities have ascribed to them.

Paragraphs 18 and 19 of TR 2009/2 discuss what constitutes a dismissal:

18. Dismissal is a particular mode of employment termination. It requires a decision to terminate employment at the employer's initiative without the consent of the employee. This stands in contrast to employment that is terminated at the initiative of the employee, for example in the case of resignation.

19. Consent in this context refers to the employee freely choosing to agree to or approve the act or decision to terminate employment in circumstances where the employee has the capacity to make such a choice. Determining whether an employee has consented to their termination requires an assessment of the facts and circumstances of each case. Consent may be either expressly stated by the employee or implied by their behaviour or conduct.

From the facts presented it is evident that a dismissal has occurred. Although the taxpayer was both an employee and a director, the decision to terminate the taxpayer's employment was made at the meeting held in early 2011 by the Board of Directors of Company C. Your client was absent during the part of the meeting where the issue of your client's continued employment as both an employee and a director was discussed and determined. Accordingly, it is considered that the dismissal of your client from both positions was effectively without your client's consent.

Paragraphs 24 to 28 of TR 2009/2 provide the following comments in relation to the meaning of redundancy:

24. As is the case in determining if there is a dismissal, the reason for a dismissal is to be established in light of the facts and circumstances of each case. The redundancy of the relevant position must be the prevailing or most influential reason for the dismissal if there is more than one contributing cause.

25. An employee's position is redundant when an employer determines that it is superfluous to the employer's needs and the employer does not want the position to be occupied by anyone. Accordingly, it is fundamentally the employer's decision that a position is redundant. On occasion the decision may be unavoidable due to the circumstances surrounding the employer's operations.

26. In some circumstances, an employer may reallocate the duties and functions attached to a particular position to another position within the employer's organisational structure. In such cases, the former position is redundant. However, if the employee who had been working in that position is still employed by the employer following the reallocation of duties and functions, there will not be a dismissal.

27. On the other hand, if an employer decides after downsizing or some other structural reorganisation to terminate an employee, the former position of the employee is redundant as long as the downsizing or reorganisation is the prevailing or most influential cause of the termination.

28. A dismissal is not caused by redundancy where personal acts or default are the prevailing or most influential cause for the termination. For example, a person may be dismissed due to unsatisfactory performance or behaviour.

A payment is classified as a GRP only upon meeting all of the requirements set under section 83-175 of the ITAA 1997 and dismissal only forms part of those requirements.

Dual capacity employee

A dual capacity employee is a person who, in addition to being engaged as an employee of an employing entity, is also a directing mind of, or holds an office with, that entity. The most common example is a person who is a director of the employer while also being a common law employee of that company. In many cases a dual capacity employee will have made or actively participated in a decision to terminate their own employment in either or both capacities.

Therefore, termination of a dual capacity employee in either employment capacity will be sufficient to be a termination of employment for Part 2-40 of the ITAA 1997 purposes, even if the person continues to hold employment with the employer in the other capacity.

However, as noted above in paragraph 18 of TR 2009/2, dismissal requires termination of employment without the employee's consent. Because a dual capacity employee can terminate their own employment or actively participate in or influence such an act or decision, careful consideration of all the facts and circumstances is required to determine whether a dual capacity employee has not consented to their termination.

For a payment to qualify as a GRP, the employee must be dismissed from employment. It is not sufficient that the person loses a particular position with an employer but continues in some other capacity. Subject to one particular exception, all employment with the employer must be severed.

As noted earlier, your client was employed with Company C as both an employee and a Director. In a meeting held in early 2011, the Board of Directors of Company C (with your client being absent at that point) made a decision that your client's position was no longer required due to the downturn in current market conditions resulting from the Global Financial Crisis. Your client's position as Resident Director was to be made redundant effective at the end of the third quarter of the 2010-11 income year and your client's position as an employee was to be terminated in the first quarter of the 2011-12 income year.

The Managing Director of Company C has confirmed that your client's position has been made redundant and that your client's employment is to be terminated in the first quarter of the 2011-12 income year.

Furthermore, the Managing Director of Company C has confirmed that the termination of your client's employment was not on account of any personal act or default.

Therefore, the termination of your client's employment in the first quarter of the 2011-12 income year was not on account of any personal act or default on your client's part, and was not due to the ordinary and customary turnover of labour. Rather the employer no longer required anyone to perform the job your client had been doing as a dual capacity employee. Therefore the employer's decision to terminate your client's employment is due to a redundancy.

Accordingly, it is considered that your client has satisfied the second criterion under subsection 83-175(1) of the ITAA 1997 in this instance.

The payment exceeds what your client would have received in consequence of the voluntary termination of their employment at the time of dismissal

The third criterion that needs to be considered is whether the payment exceeds the amount that your client could reasonably be expected to receive in consequence of the voluntary termination of your client's employment will be treated as a genuine redundancy payment.

The Commissioner considers that it is necessary to show how the amount an employee is entitled to be paid exceeds the amount that is payable to employees who voluntarily terminate their employment.

Paragraphs 61 to 63 of TR 2009/2 state:

61. It would generally be expected that a greater amount would be paid on redundancy than voluntary termination. This recognises the purpose of redundancy payments, being primarily to compensate for loss of non-transferable entitlements (for example accrued sick leave and accrued long service leave prior to 10 years service) and the peculiar hardship associated with being made redundant.

62. Contractual or other entitlements payable by an employee on voluntary termination are generally a sound guide as to what might reasonably be expected. However, this would be less so if the employer and employee are not dealing at arm's length.

63. There may be industry norms that could be used as a guide as to what payments would be made on voluntary termination. It may also be appropriate to compare standard payments made on voluntary termination within a particular company. However, these comparisons must take account of the actual nature of the dealings as influenced by the relationship between the parties.

Your client was entitled to only an amount of accrued annual leave and long service leave had your client resigned or retired from employment.

The payment is being made due to your client's role being abolished and your client's termination of employment. The payment is paid in circumstances of genuine redundancy, and is in excess of the amount that could reasonably be expected to be received by a worker in consequence of voluntary termination.

According to the facts, your client will receive a total employment termination payment of a specified amount to be paid in two instalments over the 12 month period following your client's termination of employment. It is accepted that this payment exceeds the amount your client could reasonably expect to receive if your client had resigned or retired from employment in the position your client held at the time of the dismissal. Therefore, it is considered that your client has satisfied the third criterion under subsection 83-175(1) of the ITAA 1997 in this instance.

All the criteria stipulated in subsection 83-175(1) of the ITAA 1997 have been satisfied.

Consequently it is considered that the payment constitutes a GRP within the meaning of subsection 83-175(1) of the ITAA 1997. However, a GRP must also satisfy the conditions in subsections 83-175(2) to 83-175(4).

The requirements under paragraphs 83-175(2)(a) of the ITAA 1997

As already noted previously, paragraph 83-175(2)(a) of the ITAA 1997 prescribes that the employee must be dismissed before the earlier of:

· the day he or she turned 65; or

· if the employee's employment would have terminated when he or she reached a particular age or completed a particular period of service - the day he or she would reach the age or complete the period of service (as applicable).

It is accepted that there was no date prior to your client's 65^th birthday on which your client was required to terminate employment, and that your client was not required to terminate employment before your client was dismissed on the effective date. Also given that your client was under 65 years of age at the time of your client's dismissal, your client has satisfied the requirements of paragraph 83-175(2)(a) of the ITAA 1997.

The requirements under paragraphs 83-175(2)(b) of the ITAA 1997

The years of service provided by a dismissed employee and the value of their remuneration package at the time of the dismissal are the most influential factors in determining what could reasonably be expected under an arm's length dealing.

Ensuring that the amounts paid under any actual arm's length dealings are worked out on a comparable basis to those conducted other than at arm's length is also an important factor to take into account in establishing that this condition is satisfied.

In this case, the Board of Directors of Company C made a resolution to make a payment on the termination of your client's employment due to their breach of your client's service agreement and taking into account your client's specified number of years of service with the Company and your client's executive salary.

Accordingly, it is accepted that all dealings between your client and the employer were at arm's length. Therefore it follows that your client has also satisfied the requirement under paragraph 83-175(2)(b) of the ITAA 1997.

The requirement under paragraph 83-175(2)(c) of the ITAA 1997

Also as noted previously, paragraph 83-175(2)(c) of the ITAA 1997 requires that at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal.

In the present case, there is no evidence of re-employment by your client's employer or any re-employment arrangement with another entity, so it is accepted that your client has satisfied the requirement under paragraph 83-175(2)(c) of the ITAA 1997 in this case.

The requirements under subsections 83-175(3) and 83-175(4) of the ITAA 1997

Subsection 83-175(3) of the ITAA 1997 provides that a GRP does not include any part of a payment that is received in lieu of superannuation benefits. No part of your client's payment was made to your client in lieu of superannuation benefits. Therefore it is accepted that the requirement under subsection 83-175(3) is satisfied.

Also as noted previously, subsection 83-175(4) of the ITAA 1997 provides that a payment is not a GRP if it is a payment mentioned in section 82-135 (other than a GRP or early retirement scheme payment).

Section 82-135 of the ITAA 1997 includes payments such as pensions, foreign termination payments, unused annual leave and unused long service leave.

An examination of the payment being made to your client shows that the requirement in subsection 83-175(4) of the ITAA 1997 has been satisfied.

A GRP under sections 83-170 and 83-175 of the ITAA 1997

Your client has satisfied all the criteria set out in section 83-175 of the ITAA 1997 and consequently it is considered that the payment constitutes a GRP for the purposes of section 83-170.

Tax-free treatment of a GRP

Subsection 83-170(2) of the ITAA 1997 provides that so much of the GRP that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is not assessable income and is not exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment. The formula for working out the tax-free amount is:

Base amount + (Service amount × Years of service)

In this case, your client was employed from early in the 1980's and made redundant early in the 2011-12 income year after a period of employment of a specified number of completed years. Consequently the 'years of service' to which the GRP relates to is the specified number of whole years of service.

Your client's dismissal will occur during the 2011-12 income year, and the payment will be made to your client in two instalments and within 12 months of the termination of employment. The base amount for the 2011-12 income year is $X and the service amount is $X. Therefore the tax-free amount calculated in accordance with subsection 83-170(3) of the ITAA 1997, is the tax-free part of a GRP your client can receive in the 2011-12 income year.

The tax-free amount is not assessable income and is not exempt income under subsection 83-170(2) of the ITAA 1997.

The amount in excess of the GRP is a taxable component of an employment termination payment.

Tax treatment of the employment termination payment

An employment termination payment made on or after 1 July 2007 will be comprised of the following components:

· Tax-free component this includes the pre-July 83 segment (if any) and/or the invalidity segment (if any); and

· Taxable component the amount remaining after deducting the tax free component from the total payment.

In your client's case, there is no tax-free component.

The amount in excess of the GRP is the taxable component of the employment termination payment and is to be included in your client's assessable income for the 2011-12 income year (subsection 82-10(2) of the ITAA 1997).

The employment termination payments cap (ETP cap) for the 2011-12 income year is $165,000.

As your client is over preservation age, the amount up to the ETP cap (that is, $165,000) will be taxed at 15% plus Medicare levy. The amount in excess of the cap is taxed at the top marginal rate plus Medicare levy.

The ETP cap is reduced by the amount of any earlier employment termination payment your client receives in the same income year or, in relation to the same employment termination, in previous income years. Any tax-free amounts are not counted towards the cap.

Tax treatment of the employment termination payment in the 2011-12 income year

Paragraphs 73 to 78 of TR 2009/2 refers to multiple payments for one dismissal due to redundancy and at paragraphs 73 to 78 states:

73. There will be cases where an employee receives payments in consequence of their dismissal due to redundancy other than as one amount paid at a single point of time. For example, an employee's redundancy payout may be paid as a series of amounts, whether by way of structured instalments or due to cash flow constraints of the payer. It is also possible that amounts paid in consequence of dismissal due to redundancy may be made by more than one payer, which may or may not include the terminating employer.

74. While it may be possible to identify more than one 'payment' in some of these circumstances according to the ordinary meaning of that term, the Commissioner considers that the provisions of Part 2-40 operate to unify any such payments as a single sum attributable to redundancy when working out the tax treatment of the payments.

75. Therefore, in these circumstances, it is necessary to properly take account of all other redundancy payments made at the same or an earlier time when working out how to treat a given redundancy payment. The structure of Part 2-40 and provisions governing the tax treatment of the payments contemplates that this cumulative approach be adopted.

76. This requires that all payments made in consequence of the dismissal up to and including the time of the payment in question are assessed against a single voluntary termination element worked out at the time of the dismissal. Similarly, the tax-free amount of a genuine redundancy payment can only be claimed once for any given termination of employment because of redundancy.

77. Where multiple redundancy payments are made over more than one income year, this cumulative approach does not require that the payments be brought to account in a single income year. To the extent that the payments are taxable, they are brought to account in the year that they are received.

78. The elements in working out the tax-free amount threshold for a genuine redundancy payment under section 83-170 are indexed annually. In bringing amounts to account in the year that they are received, the total tax-free amount applied under this cumulative approach is that in the latest income year an amount is received.

In this case, the 2^nd instalment of the payment is being made to your client for the dismissal due to redundancy in the 2012-13 income year.

As noted above, the tax-free amount of a GRP can only be claimed once for any given termination of employment because of redundancy.

Therefore, as the tax-free amount of the GRP has been exhausted in the 2011-12 income year, the 2^nd instalment of the payment is entirely a taxable component of an employment termination payment and is to be included in your client's assessable income for the 2012-13 income year.

However, if the ETP cap of $165,000 is indexed in the 2012-13 income year, the indexed amount only will be taxed at 15% plus Medicare levy. The remaining amount will be taxed at the top marginal rate plus Medicare levy.