New Rules Apply to Some ETP's - "Whole-of-income" Cap

(last updated 05/06/2014)

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NOTE – These rules do not apply to Genuine 
Redundancy Payments (see below)

On 1 July 2012, the concessional tax treatment for ETPs changed. From that date there is an additional $180,000 non-indexed whole-of-income cap (not to be confused with ETP Cap which is indexed). 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 (see below) 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
  • golden handshakes
  • payment for rostered days off
  • payment for unused sick leave
  • gratuities.
Other taxable income for whole-of-income cap includes:
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
  • bonuses
  • 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
NOTE – The Adjusted Taxable Income (ATI) rules do not apply in this formula.

EXAMPLE - Including taxable income in the whole-of-income cap:
In August 2012, Tyrion is terminated from his job and receives a $100,000 gratuity and $20,000 for accrued leave.

His employer also paid Tyrion $5,000 in salary for the period 1 July 2012 to date of termination. When working out the tax on Tyrion's ETP of $100,000, his employer calculates his whole-of-income cap as $155,000, being $180,000 less $25,000 (salary plus accrued leave payment). The calculated whole-of-income cap is less than the ETP cap ($175,000 for 2012–13) and, as Tyrion has not reached his preservation age, his employer withholds 31.5% in tax from the $100,000 ETP, totalling $31,500. Tyrion's employer gives him a PAYG payment summary – employment termination payment showing:
  • Total tax withheld $31,500
  • Date of payment 15 August 2012
  • Taxable component $100,000
  • Tax-free component Nil
  • ETP code O.
Tyrion gets a new job in September 2012 and earns a further $60,000 salary in the 2012–13 income year.

When calculating the tax on Tyrion'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.

Therefore, Tyrion's calculated whole-of-income cap is now $95,000 (that is, $180,000 minus $85,000), which means $5,000 of his $100,000 ETP will be taxed at 46.5% 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 2012 termination. 

Tyrion will need to pay an additional 15% tax on the $5,000 (that is, 46.5% minus the 31.5% already withheld by his employer). This means Tyrion will have a tax debt of $750.

Note, in this example, if Tyrion had reached preservation age, the tax rate would be applicable to the amount under the caped amount would be 16.5% - not 31.5. The 46.5% rates would still apply for the amount over the cap.

See this post for details on Preservation Age.

See this post for details of Genuine Redundancy Payments.

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