The window of opportunity to roll lump sum payments, such as ‘golden handshakes’, straight into super is closing, with the rules set to change at the start of the new financial year.
Employment Termination Payments (ETP), as the name suggests, are made in consequence of the termination of employment. They include golden handshakes, amounts in lieu of notice, amounts for unused rostered days off, employee’s invalidity payments and certain payments after the death of an employee. However, they don’t include payments for unused annual leave or unused long service leave, or the tax-free part of genuine redundancy payments or early retirement scheme payments.
One type of ETP that is rolled into super is what’s called a Directed Termination Payment (DTP) .
From 1 July 2007, DTPs are no longer possible, unless they met the strict transitional rules in place between 1 July 2007 and 1 July 2012. The rules stipulate that there must have been a written employment contract or Workplace Agreement in force just before 10 May 2006 for the ETP to be rolled into super. However, this opportunity ceases on 30 June 2012.
Benefits of DTPs
DTPs are considered to be assessable income of the super fund, and non-assessable non-exempt income of the contributing individual. This means that the DTP will be taxed at 15% when it is contributed to super as long as it stays within a lifetime cap of $1 million, which is a substantial tax concession compared to taxing of ETPs.
The earnings from investing those contributions are also taxed at 15% instead of the individual’s marginal tax rate (MTR). Additionally, when the fund is in the pension phase, including ‘transition to retirement’ income streams, earnings on assets supporting the pension are tax-free. This represents a significant tax saving compared to investments held outside of super.
Further, the amount of the DTP (up to $1million) won’t count towards the individual’s contributions cap. Any excess above that amount will count towards the concessional contribution cap, which is $25,000 or $50,000 for over 50’s this financial year. With the cap for over 50’s reduced to $25,000 for next financial year, this is a last opportunity for those in that age bracket to build super at generous tax rates and limits without risking excess contributions tax.
What to watch out for
Even though DTPs don’t count towards contribution caps, they are still considered a contribution for super purposes. This means that individuals aged 65 and over must meet the work test to roll their payments into super.
The work test requires that an individual has worked 40 hours in a period of 30 consecutive days in a financial year, before the contribution is made. Individuals aged 75 and over won’t be able to contribute this amount into super, regardless of their work status.
Amounts above the $1 million DTP cap must be monitored to ensure that they don’t breach the concessional cap. If this transpires, excess concessional contributions tax will be incurred and the amount above the concessional cap will count towards the non-concessional cap. Further tax will be levied if that amount then breaches the non-concessional cap. Unquestionably – a circumstance to avoid!
Consider acting now
The DTP that is rolled over into the super fund must be received by 30 June 2012. After this date, no part of the payment can be rolled into super.
Once rolled into super, the payment will be treated as a normal ETP with a 15% tax rate up to a $175,000 cap (2012/13) for those over preservation age, and 30% for those under preservation age.
From 1 July, the part of the ETP that takes a person’s taxable income above $180,000 will be taxed at the individual’s MTR.
For eligible individuals who are leaving their job and are due to receive these termination payments, it may be worthwhile to consider it before 30 June to reduce the tax payable and maximise superannuation contributions.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.
