Chapter 6 Termination Payments National Core Accounting publications

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Chapter 6 Termination Payments © National Core Accounting publications 1

Chapter 6 Termination Payments © National Core Accounting publications 1

Overview Various lump sum payments may be received by employees when they terminate their

Overview Various lump sum payments may be received by employees when they terminate their employment through: • resignation, • retirement, • dismissal, • redundancy, or • invalidity © National Core Accounting publications 2

Overview Lump sum payments may be received in relation to: • Superannuation • Employment

Overview Lump sum payments may be received in relation to: • Superannuation • Employment Termination Payments (ETP’s) • Unused Leave • Redundancy/Early Retirement © National Core Accounting publications 3

Superannuation Benefits A superannuation benefit can be paid as either a: Lump sum benefit

Superannuation Benefits A superannuation benefit can be paid as either a: Lump sum benefit or Income stream benefit All superannuation benefits may have two components: Tax-free component or Taxable component © National Core Accounting publications 4

Superannuation Benefits The taxation of superannuation benefits depends upon: • • age of the

Superannuation Benefits The taxation of superannuation benefits depends upon: • • age of the recipient lump sum or income stream benefit tax-free or taxable component whether the taxable component includes an “element taxed in the fund” or “element untaxed in the fund” In all cases the tax-free component is exempt from tax (i. e. NANE income). © National Core Accounting publications 5

Superannuation Benefits Preservation age Preservation is a restriction that prevents a member from accessing

Superannuation Benefits Preservation age Preservation is a restriction that prevents a member from accessing superannuation benefits until satisfying a condition of release. Preservation age depends upon a person’s date of birth, as below: Date of Birth Preservation Age Before 1 July 1960 55 1 July 1960 to 30 June 1961 56 1 July 1961 to 30 June 1962 57 1 July 1962 to 30 June 1963 58 1 July 1963 to 30 June 1964 59 After 30 June 1964 60 Therefore, for the 2014/15 income year, preservation age is 55 years. © National Core Accounting publications 6

Superannuation Benefits Conditions of Release Preserved superannuation entitlements are preserved until the taxpayer: •

Superannuation Benefits Conditions of Release Preserved superannuation entitlements are preserved until the taxpayer: • has permanently retired from gainful employment having reached preservation age, • leaves an employment arrangement after age 60, • reaches age 65, • becomes permanently incapacitated, • dies, • obtains release on compassionate grounds (e. g. terminal illness, severe financial hardship), or, • meets the conditions of the particular fund’s governing rules. © National Core Accounting publications 7

Superannuation Benefits Taxed superannuation funds A taxed superannuation fund is a fund that is

Superannuation Benefits Taxed superannuation funds A taxed superannuation fund is a fund that is taxed at 15% on employer and salary sacrificed contributions in the income year that the contributions are received. Personal after-tax contributions and those received under the government's cocontribution scheme are not taxed. Income which is earned in the fund (investment earnings) is also taxed at the rate of 15%. Most superannuation funds are taxed funds. An amount received from a taxed superannuation fund is called an element taxed in the fund. © National Core Accounting publications 8

Superannuation Benefits Taxed source benefits i. e. “element taxed in the fund”. Aged 60

Superannuation Benefits Taxed source benefits i. e. “element taxed in the fund”. Aged 60 years and over: If the recipient is aged 60 and over both superannuation lump sums and income stream benefits are not assessable income. © National Core Accounting publications 9

Superannuation Benefits Taxed source benefits: Preservation Age to 59 years: If the recipient is

Superannuation Benefits Taxed source benefits: Preservation Age to 59 years: If the recipient is aged 55 to 59 and over both superannuation lump sums and income stream benefits are assessable income. Concessional tax treatment applies. © National Core Accounting publications 10

Superannuation Benefits Taxed source benefits Below Preservation Age: If the recipient is aged less

Superannuation Benefits Taxed source benefits Below Preservation Age: If the recipient is aged less than 55 both superannuation lump sums and income stream benefits are assessable income, and are taxed at marginal tax rates. © National Core Accounting publications 11

Superannuation Benefits - Element Taxed in the Fund Aged 60 and Over Preservation Age

Superannuation Benefits - Element Taxed in the Fund Aged 60 and Over Preservation Age to 59 Below Preservation Age Lump Sum Tax-free (not assessable income or exempt income) Assessable income. Taxed at 0% on the first $185, 000 (low cap amount) and 15% maximum on excess over $185, 000 in 2014/15. Assessable income. Taxed up to a maximum rate of 20%. Income Stream Tax-free (not assessable income or exempt income) Assessable income. Taxed at marginal tax rates. Tax offset equal to 15% of the income stream available. Assessable income. Tax offset equal to 15% of the income stream available if the benefit is a disability benefit. * plus 2% Medicare Levy in all cases where applicable. © National Core Accounting publications 12

Superannuation Benefits Untaxed superannuation funds An untaxed superannuation fund means that the Commonwealth Government

Superannuation Benefits Untaxed superannuation funds An untaxed superannuation fund means that the Commonwealth Government does not tax either the contributions an employer makes on behalf of the employee or the investment earnings, until the taxpayer leaves that superannuation scheme. The amounts in untaxed superannuation funds are only taxed when the benefit is paid, not while the money is accumulating in the account. An amount received from an untaxed superannuation fund is called an element untaxed in the fund. © National Core Accounting publications 13

Superannuation Benefits Untaxed source benefits i. e. “element untaxed in the fund”. The tax

Superannuation Benefits Untaxed source benefits i. e. “element untaxed in the fund”. The tax treatment of a superannuation benefit paid from an untaxed source depends upon: • the age of the recipient, • whether the amount is paid as a lump sum or as an income stream, and • whether the benefit contains a tax free or taxable component A tax free component is exempt from tax. © National Core Accounting publications 14

Superannuation Benefits Untaxed source benefits Aged 60 years and over: If the recipient is

Superannuation Benefits Untaxed source benefits Aged 60 years and over: If the recipient is aged 60 and over both superannuation lump sums and income stream benefits are assessable income. Concessional tax treatment applies. © National Core Accounting publications 15

Superannuation Benefits Untaxed source benefits Preservation Age to 59 years: If the recipient is

Superannuation Benefits Untaxed source benefits Preservation Age to 59 years: If the recipient is aged 55 to 59 and over both superannuation lump sums and income stream benefits are assessable income. Concessional tax treatment applies. © National Core Accounting publications 16

Illustration: Superannuation lump sum Adam, retired, is aged 59 years. He received a superannuation

Illustration: Superannuation lump sum Adam, retired, is aged 59 years. He received a superannuation lump sum of $1, 400, 000 made up of an element untaxed in the fund. Required: Calculate the assessable amount of the lump sum and the applicable tax rates. Solution: The assessable amount is $1, 400, 000. As Adam has reached his preservation age, the lump sum will be taxed as follows: At a maximum rate of 15% (plus Medicare Levy) on the first $185, 000 (i. e. the low cap rate). At a maximum rate of 30% (plus Medicare Levy) on $1, 170, 000 (i. e. the excess over $185, 000 up to the untaxed plan cap of $1, 355, 000), and, At the top marginal tax rate of 47% (plus Medicare Levy) on $45, 000 (i. e. the excess over the untaxed plan cap amount of $1, 355, 000). © National Core Accounting publications 17

Superannuation Benefits Untaxed source benefits Below Preservation Age: If the recipient is aged less

Superannuation Benefits Untaxed source benefits Below Preservation Age: If the recipient is aged less than 55 both superannuation lump sums and income stream benefits are assessable income. Concessional tax treatment applies to Lump sums. © National Core Accounting publications 18

Superannuation Benefits - Element Untaxed in the Fund Aged 60 and Over Preservation Age

Superannuation Benefits - Element Untaxed in the Fund Aged 60 and Over Preservation Age to 59 Below Preservation Age Lump Sum Assessable income. Taxed at a maximum rate of 15% up to $1, 355, 000 (the untaxed plan cap amount) and at the highest rate on excess over $1, 355, 000 in 2014/15. Assessable income. Taxed at a maximum of 15% up to $185, 000 (low cap amount) and 30% maximum on excess up to $1, 355, 000 and the highest marginal rate in excess of $1, 355, 000. Assessable income. Taxed at a maximum rate of 30% up to the untaxed plan cap of $1, 355, 000 and the highest marginal rate in excess of $1, 355, 000. Income Stream Assessable income. Taxed at marginal tax rates. Tax offset equal to 10% of the income stream available. Assessable income. Taxed at the marginal tax rates. Assessable income. Taxed at marginal tax rates. © National Core Accounting publications 19

Comprehensive Illustration: Superannuation Lump Sums Moses, aged 65, a resident taxpayer with private health

Comprehensive Illustration: Superannuation Lump Sums Moses, aged 65, a resident taxpayer with private health insurance, retired on 31 March 2015. He received a superannuation lump sum of $400, 000 which comprised a tax-free component of $50, 000 and a taxable component made up of an element untaxed in the fund of $250, 000 and an element taxed in the fund of $100, 000. PAYG withheld on the lump sum was $41, 250. Moses derived gross wages of $45, 000 (PAYG tax withheld was $8, 800) for the income year. Required: Calculate the following: (a) taxable income (b) tax payable (including the tax offset) © National Core Accounting publications 20

Solution: (a) Taxable Income is: Assessable Income Gross Wages Superannuation - element untaxed in

Solution: (a) Taxable Income is: Assessable Income Gross Wages Superannuation - element untaxed in the fund $ 45, 000 250, 000 295, 000 Note: The tax-free component $50, 000 and the element taxed in the fund $100, 000 are both tax-free. (b) * Tax Offset is: Tax on $295, 000 less tax at marginal rates on $45, 000 tax at concessional rates Superannuation lump sum - element untaxed in fund 250, 000 x 15% $ 6, 172. 00 37, 500. 00 * Refer to Chapter 6 Appendix 1 for step by step instructions. Tax Payable is: Tax on $295, 000 less Tax Offset Medicare Levy less PAYG tax withheld (8, 800 + 41, 250) Refund Due 478. 00 © National Core Accounting publications $ 108, 597. 00 43, 672. 00 64, 925. 00 $ 108, 597. 00 64, 925. 00 43, 672. 00 5, 900. 00 49, 572. 00 50, 050. 00 21

Accessing Superannuation Benefits Accessing superannuation benefits A taxpayer can access their superannuation: • when

Accessing Superannuation Benefits Accessing superannuation benefits A taxpayer can access their superannuation: • when they reach preservation age and retire. • when they turn 65 (even if they haven’t retired). • under the transition to retirement rules (if they are eligible) while continuing to work. Early release of benefits There also very limited circumstances in which the taxpayer may be able to access their superannuation before they retire. These circumstances are: • severe financial hardship. • a terminal medical condition. • certain compassionate grounds. • permanent or temporary incapacity. © National Core Accounting publications 22

Employment Termination Payments (ETP’s) Examples of ETP’s include: • • • Payments for unused

Employment Termination Payments (ETP’s) Examples of ETP’s include: • • • Payments for unused sick leave “Golden handshakes” Amounts for unused rostered days off Invalidity payments Amounts in lieu of notice © National Core Accounting publications 23

Employment Termination Payments (ETP’s) Life Benefit Termination Payments • Are received by taxpayer as

Employment Termination Payments (ETP’s) Life Benefit Termination Payments • Are received by taxpayer as a consequence of employment termination Death Benefit Termination Payments • Are received by a person after another person’s death in consequence of employment termination © National Core Accounting publications 24

Employment Termination Payments (ETP’s) Life benefit ETP’s • Tax free component - is tax

Employment Termination Payments (ETP’s) Life benefit ETP’s • Tax free component - is tax free. • Taxable component - is assessable. - taxed at 15% maximum up if preservation age reached, or at 30% if under preservation age. Any excess over $185, 000 (employment termination payment cap) taxed at highest marginal tax rate. © National Core Accounting publications 25

Illustration: Tax treatment of a Life Benefit ETP Sue retired at age 65 after

Illustration: Tax treatment of a Life Benefit ETP Sue retired at age 65 after completing 41 years of service with her employer. She received a retirement bonus of $205, 000, of which $10, 000 is the pre July 1983 segment of the payment. Required: Calculate the assessable amount of the ETP and the applicable tax rates. Solution: The tax-free component is $25, 000. The taxable component is 200, 000 less 10, 000 = $190, 000 As Sue has reached her preservation age, the taxable component will be taxed as follows: At a maximum of 15% (plus Medicare Levy) on the first $185, 000 (i. e. the employment termination payments cap), and, At the top marginal rate of 47% (plus Medicare Levy) on $5, 000 (i. e. the excess over $185, 000). © National Core Accounting publications 26

Employment Termination Payments (ETP’s) Death benefit ETP’s • Tax free component - is tax

Employment Termination Payments (ETP’s) Death benefit ETP’s • Tax free component - is tax free. • Taxable component - is assessable. - tax free up to $185, 000 (employment termination payment cap). - taxed at highest marginal rate on excess over $185, 000. © National Core Accounting publications 27

Employment Termination Payments (ETP’s) From 1 July 2012, only that part of an affected

Employment Termination Payments (ETP’s) From 1 July 2012, only that part of an affected ETP that takes a taxpayer’s total annual taxable income (including the ETP) to no more than $180, 000 will receive the ETP tax offset. Whole-of-income cap The $180, 000 whole-of-income cap is reduced by any other taxable income derived in the income year. Amounts above this whole-of-income cap will be taxed at marginal rates. The whole-of-income cap incorporates other taxable income that the taxpayer derives in the same income year. Other taxable income is simply assessable income minus deductions. © National Core Accounting publications 28

Unused Annual Leave Pre 18 August 1993 Post 17 August 1993 Assessable income. Taxed

Unused Annual Leave Pre 18 August 1993 Post 17 August 1993 Assessable income. Taxed at marginal tax rates. Tax offset limits the tax rate to a maximum of 30%. No tax offset applicable. Formula: Unused AL x Pre 18/8/93 days Total days * plus 2% Medicare Levy in all cases where applicable. © National Core Accounting publications 29

Unused Long Service Leave Pre 16 August 1978 Post 15 August 1978 to Pre

Unused Long Service Leave Pre 16 August 1978 Post 15 August 1978 to Pre 18 August 1993 5% is Assessable income. Post 17 August 1993 Assessable income. Taxed at marginal tax rates. No tax offset applicable. Tax offset limits the tax No tax offset applicable. rate to a maximum of 30% Formula: Unused AL x Post 17/8/93 days Total days * plus 2% Medicare Levy in all cases where applicable. © National Core Accounting publications 30

Illustration: Unused Annual Leave/Long Service Leave Lump Sums Tex Payer, a resident taxpayer, with

Illustration: Unused Annual Leave/Long Service Leave Lump Sums Tex Payer, a resident taxpayer, with adequate private health insurance, commenced employment on 17 August 1991 and retired on 2 July 2014. His employment service period was 8, 355 days, of which 731 days were pre 18 August 1993. He had never taken any LSL and had accrued 30 days of unused LSL. The lump sums received were: § Unused Annual Leave $3, 000. § Unused Long Service Leave $10, 400. Tex also derived $70, 000 gross wages for the year ended 30 June 2015. Total PAYG tax withheld was $20, 500. Required: Calculate the following: (a) the pre 18/8/93 and post 17/8/93 unused Annual Leave components. (b) the post 17/8/93 and pre 18/8/93 unused LSL components. (c) taxable income. (d) tax payable (including the tax offset). © National Core Accounting publications 31

Solution: (a) Pre 18/893 Unused AL 3, 000 x 731/8, 355 = $262 (b)

Solution: (a) Pre 18/893 Unused AL 3, 000 x 731/8, 355 = $262 (b) Post 17/8/93 Unused LSL 10, 400 x 7, 624/8, 355 = $9, 490 (c) Taxable Income is: Assessable Income Gross wages Unused Annual Leave - pre 18/8/93 - post 17/8/93 Unused LSL - post 17/8/93 - pre 18/8/93 83, 400 Post 17/8/93 Unused AL 3, 000 – 262 = $2, 738 Pre 18/8/93 Unused LSL 10, 400 – 9, 490 = $910 $ 70, 000 262 2, 738 9, 490 910 © National Core Accounting publications 32

Solution: (d) * Tax offset is: $ $ Tax on $83, 400 less tax

Solution: (d) * Tax offset is: $ $ Tax on $83, 400 less tax at marginal rates on $82, 228 i. e. tax on (70, 000 + 2, 738 + 9, 490) 18, 371. 36 tax at concessional rates Unused AL pre 18/8/93 262 Unused LSL pre 18/8/93 910 1, 172 x 30% 351. 60 18, 722. 96 82. 04 * Refer to Chapter 6 Appendix 1 in textbook for step by step instructions. Tax Payable is: Tax on $83, 400 less Tax Offset 18, 722. 96 Medicare Levy 20, 390. 96 less PAYG tax withheld Refund Due © National Core Accounting publications $ 18, 805. 00 82. 04 1, 668. 00 20, 500. 00 199. 04 33

Genuine Redundancy Payments A genuine redundancy payment is one received by an employee who

Genuine Redundancy Payments A genuine redundancy payment is one received by an employee who is dismissed from employment because the employee’s position is genuinely redundant. A genuine redundancy can also occur where an employee voluntarily accepts a redundancy/retirement package or is placed in a position leaving them little option but to resign. It may consist of both an assessable and tax-free (exempt) amount. © National Core Accounting publications 34

Genuine Redundancy Payments The tax-free amount for 2014/15 is calculated as follows: $9, 514

Genuine Redundancy Payments The tax-free amount for 2014/15 is calculated as follows: $9, 514 plus $4, 758 for each whole year of completed service with the employer concerned. © National Core Accounting publications 35

Illustration: Genuine Redundancy Payment Adam commenced employment in July 2005 and was made redundant

Illustration: Genuine Redundancy Payment Adam commenced employment in July 2005 and was made redundant in May 2015 (9 whole years of completed service). He received a $60, 000 genuine redundancy payment. Required: Calculate the assessable amount of the genuine redundancy payment. Solution: The tax-free amount of the payment is: $9, 514 + ($4, 758 x 9) = $ 52, 336 Thus, $7, 664 of the genuine redundancy payment is assessable income (i. e. 60, 000 – 52, 336). © National Core Accounting publications 36

Early Retirement Scheme Payments An early retirement scheme payment is an incentive payment offered

Early Retirement Scheme Payments An early retirement scheme payment is an incentive payment offered to employees who an employer wishes to replace. These payments are designed to encourage early retirement or resignation. For tax purposes, they are treated in exactly the same way as genuine redundancy payments. © National Core Accounting publications 37

Illustration: Early Retirement Scheme Payment Eve received an early retirement scheme payment of $60,

Illustration: Early Retirement Scheme Payment Eve received an early retirement scheme payment of $60, 000 during the current income year after 12 whole years of service with her employer. Required: Calculate the assessable amount of the early retirement scheme payment. Solution: The tax-free amount of the payment is: $9, 514 + ($4, 758 x 12) = $ 66, 610 Thus, the whole amount of the $60, 000 early retirement scheme payment is tax-free (i. e. non-assessable non-exempt income). There is no assessable amount. © National Core Accounting publications 38

Effect of Genuine Redundancy and Retirement Scheme Payments Where a taxpayer receives either a

Effect of Genuine Redundancy and Retirement Scheme Payments Where a taxpayer receives either a genuine redundancy payment or an early retirement scheme payment it is treated as an ETP taxable component. Also any post 17 August 1993 accrued annual leave and accrued long service leave lump sum amounts are taxed at a maximum tax rate of 30% (plus Medicare Levy) instead of at the usual ordinary marginal tax rates. © National Core Accounting publications 39

Comprehensive Illustration: Various Termination Payments Jia, a resident taxpayer aged 58 years, was made

Comprehensive Illustration: Various Termination Payments Jia, a resident taxpayer aged 58 years, was made redundant by her employer during the year ended 30 June 2015. She had worked for that employer for 5 whole years and had adequate private health insurance. She provides the following information: Gross Wages $ 21, 500 Accrued annual leave 1, 000 ETP - unused sick leave (taxable component) 5, 000 Superannuation income stream benefit (taxable component) 25, 000 - element taxed in the fund Superannuation lump sum (taxable component) 190, 000 - element taxed in the fund Genuine Redundancy Payment 35, 000 PAYG tax withheld from gross wages was $2, 200, from unused sick leave $1, 200, and from superannuation payments $4, 000. Required: Calculate the following: (a) taxable income. (b) tax payable (including the tax offset). © National Core Accounting publications 40

Solution: (a) Taxable Income is: Assessable Income Gross Wages Accrued annual leave ETP -

Solution: (a) Taxable Income is: Assessable Income Gross Wages Accrued annual leave ETP - unused sick leave (taxable component) Superannuation income stream benefit (taxable component) - element taxed in the fund Superannuation lump sum (taxable component) - element taxed in the fund Genuine Redundancy Payment 35, 000 – ($9, 514 + ($4, 758 x 5)) (b) * Tax Offset is: Tax on $244, 196 less tax at marginal rates on $46, 500 i. e. Tax on (21, 500 + 25, 000) less tax at concessional rates Accrued annual leave 1, 000 x 30% ETP - unused sick leave 5, 000 x 15% Genuine Redundancy Payment 1, 696 x 15% Superannuation - element taxed in fund (190, 000 – 185, 000) x 15% 76, 005. 22 * Refer to Chapter 6 Appendix 1 for step by step instructions. © National Core Accounting publications $ 21, 500 1, 000 5, 000 25, 000 190, 000 1, 696 244, 196 $ 84, 719. 12 $ 6, 659. 50 300. 00 750. 00 254. 40 1, 500. 00 8, 713. 90 41

Solution: Tax Payable is: Tax on $244, 196 less Tax Offset $ 76, 005.

Solution: Tax Payable is: Tax on $244, 196 less Tax Offset $ 76, 005. 22 Tax Offset on income stream benefit 25, 000 x 15% 3, 750. 00 Medicare Levy (244, 196 – 185, 000) x 2% less PAYG tax withheld (2, 200 + 1, 200 + 4, 000) Refund due © National Core Accounting publications $ 84, 719. 12 79, 755. 22 4, 963. 90 1, 183. 92 6, 147. 82 7, 400. 00 1, 252. 18 42