Termination Payments: A New Landscape for Employers

Prior to July 1, 2007, payments made as a consequence of a termination of employment were regarded as eligible termination payments. More importantly for employers and relevant employees, such payments were generally able to be rolled over into a superannuation fund tax free to the employee.

Under the simplified superannuation reforms introduced by the government as part of the 2006 Federal Budget, 'employment termination payments' replace eligible termination payments. This new concept of a termination payment encompasses any termination payment made by an entity other than a superannuation entity.

As a consequential amendment, reasonable benefit limits have been abolished from 1 July 2007. Instead, under the new regime, employment termination payments received in a given year (or where the payment relates to a 'single termination' and the payment is split over more than one year) will receive concessional tax treatment for amounts paid below a cap called the lower employment termination payments cap. The cap is presently set at $140,000, and will be indexed.

It is a condition of access to the concession that, generally, employment termination payments be made within 12 months of the relevant termination. Transitional arrangements may apply to payments made between 1 July 2007 and 30 June 2012 (known as 'transitional termination payments'). An employee can direct that their transitional termination payment be made to a complying superannuation fund or to the purchase of an annuity, in which case the payment is tax-free to the employee.

All of this raises several questions for an employer attempting to unravel the new landscape following the Simpler Super reforms.

* What is an 'employment termination payment'?

* What is excluded from the new regime?

* What transitional arrangements exist?

* What are the tax consequences of an employment termination payment?

This article addresses these questions at a high level, with a view to providing employers with a guide to understanding the new landscape for termination payments and their tax treatment. It does not, however, go into how the new rules apply to death benefit termination payments.

What is an employment termination payment?

Under the Income Tax Assessment Act 1997 (the Act), an employment termination payment is a lump sum payment that is made to a person in consequence of the termination of the person's employment. The Act deems the termination of employment as including retirement from employment and cessation from employment because of death. Beyond this, there is a large body of case law which has considered the meaning of the phrase 'in consequence of'  the termination of employment which are not explored in this article.