Budget break on termination payouts

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Budget break on termination payouts

Taxation consultant, Shirley Murphy identifies the changes introduced in the Federal Budget to the surcharge on employer termination payments.

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Taxation consultant, Shirley Murphy identifies the changes introduced in the Federal Budget to the surcharge on employer termination payments.

Low and middle income earners were given some relief from the surcharges on employer termination payments in the Budget handed down on 22 May.

1. Currently, as a transitional measure until 19 August 2001, employees who receive a termination payment from an employer (eg. a redundancy payment or a golden handshake) are liable for the termination payments surcharge only on the part of the termination payment that accrued after 20 August 1996 (when the surcharges commenced). This transitional arrangement has been made permanent, and surcharge will continue to be imposed only on the part of a termination payment that relates to the post 20 August 1996 period of service.

2. A termination payment that was, either wholly or in part, rolled over into a superannuation fund rather than taken in cash between 20 August 1996 and 1 July 1997 will be liable to the superannuation contributions surcharge only on the part of the payment that accrued after 20 August 1996. This already applies to payments rolled over from 1 July 1997.

3. From 22 May 2001, there will be no surcharge on the part of an employer termination payment that exceeds the employee's reasonable benefit limits. As the lump sum reasonable benefit limit for 2000/01 is $506,092, this will generally affect only high income earners, or those who have amassed considerable savings in superannuation. Although these 'excessive' amounts will continue to be taxed at the 47 per cent rate plus 1.5 per cent Medicare levy, the possibility of an additional 15% surcharge has been removed.

4. A measure will be introduced to prevent low income earners being forced over the surcharge threshold when they receive a termination payment (eg. a redundancy payment) from their employer. When an employee receives an employer termination payment that is less than the upper surcharge threshold for the year ($98,955 for 2000/01), only the amount of the termination payment divided by a taxpayer's years of service will be included when comparing their income with the surcharge thresholds. This will mean that employees who receive moderate termination payments and who otherwise do not have high incomes will have a reduced or no surcharge liability. This will apply to payments made since 20 August 1996.

Example: In 2000/01, an employee earns a salary of $58,000 and also receives a redundancy payment of $60,000. Assume that $15,000 of the redundancy payment is tax-free, based on the employee's years of service with the employer. The remaining $45,000 would be a termination payment under the surcharge rules. In the absence of the proposed changes, the $45,000 would be added to the $58,000 salary to make the employee's income exceed the surcharge threshold and surcharge would be imposed. Assuming that the employee has 9 years of service with the employer, under the new measures, only $45,000 divided by 9 is included when determining the employee's income. Because the employee's $58,000 salary plus $5,000 from the termination payment does not exceed $98,955 (the upper threshold), no surcharge liability arises.

For termination payments equal to or greater than the upper surcharge threshold, the entire payment will continue to be included in the employee's income for surcharge purposes.

Tax office administrative arrangements

To implement these changes, Deputy Tax Commissioner Leo Bator said on Budget night that the Tax Office would write to people who received a surcharge assessment before 1 July 2000 where the employer termination payment taken in cash or rolled-over was below the following upper threshold amounts:

  • 1996/1997 $85,000
  • 1997/1998 $88,910
  • 1998/1999 $92,111
  • 1999/2000 $94,966
  • 2000/2001 $98,955

The surcharge assessments of employees who received an employer termination payment above these amounts in any relevant year will not be reviewed.

The Tax Office will automatically reassess the liability for taxpayers who have received a termination payments assessment or superannuation contributions surcharge assessment in the 2000/01 income year.

Government still committed to choice of fund 

The Government still remains publicly committed to the introduction of choice of fund for employer superannuation guarantee contributions, and has made specific provision ($14 million) out of the existing Tax Office allocation to fund education and communication programmes. The Budget's estimates for the Commonwealth's own superannuation costs assume a start date of 1 July 2002. Despite this, employers should not assume that choice of fund is inevitable, given an intervening election and opposition from the non-Government parties.

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