eligible termination payment

abbrev. ETP, generally composed of lump sum payment made before 1 July 2007 from a superannuation fund/RSA, an employer to an employee when he/she ceases employment, or a rollover fund. Provided the recipient is under age 65, the ETP can be rolled over into an approved deposit fund, deferred annuity, alternative superannuation fund or RSA.

For the purpose of calculating the tax payable it is split into components:

excessive component — the ETP is tested against the individual’s reasonable benefit limit (RBL). Any amount above the RBL is said to be the excessive component. From 1 July 2002, the post-June 83 taxed element of an excessive component is taxed at 38% (plus Medicare levy), and the remainder of the excessive component is taxed at 47% (plus Medicare levy).

pre-July 1983 component — calculated by splitting the ETP amount (minus concessional, non-qualifying invalidity, undeducted and excessive components) according to the total days of the eligible service period. Five per cent of this component is taxed at the individual’s marginal tax rate.

concessional component — until 30 June 1994, consisted of invalidity, bona fide redundancy or approved early retirement scheme payments. Five per cent of the amount was taxed at marginal rates. From 1 July 1994, approved early retirement and redundancy payments do not form part of an ETP. Concessional components are not able to be paid from superannuation funds from 1 July 1994, although they may still be paid directly by employers.

post-June 1994 invalidity component — from 1 July 1994, consists of invalidity payments. This component is tax free.

non-qualifying component — any amount which arises as a result of the commutation of an annuity which was not wholly purchased with a rolled over ETP. Assessable as ordinary income on the non-rollover component.

undeducted contributions — includes contributions made to a superannuation provider by an individual after June 1983 for which no tax deductions were allowable. Contributions made after June 1990 for which a rebate was claimed still count as undeducted contributions. No tax is payable on undeducted contributions.

post-June 1983 component — the balance of the ETP. Tax treatment is different depending on age and amount of payout. If withdrawn before age 55 from a taxed source, tax is payable on the whole of this balance at the rate of 20 per cent (plus Medicare levy). If withdrawn after age 55 from a taxed source, there is a tax-free amount, above which there is a tax rate of 15 per cent (plus Medicare levy).

An ETP may also contain a CGT exempt component - that part of an ETP that arose under the CGT retirement exemption rules.

From 1 July 2007 a lump sum payment on termination of employment is an Employment Termination Payment (ETP) and a lump sum payment from a superannuation fund is a Superannuation Lump Sum.

See also approved early retirement payment , bona fide redundancy payment , death benefit , lump sum , rollover fund , crystallisation , employment termination payment