You will notice that the income tax return form contains items for Lump Sum Payments and Eligible Termination Payments (ETP's).

 You will only need to concern yourself with these items if the group certificate contains such amounts. They will appear in a separate box on the group certificate, usually to the right of the salary and allowances boxes.

You return payments in respect of unused annual and long service leave at the lump sum payments item. They will be shown in the LUMP SUM PAYMENTS column of the group certificate next the letters 'A' and 'B'.

If the payment is an eligible termination payment, you will also have a 'Statement of Termination' form, which has been completed by the person making the payment. This contains a break up of all the amounts, which make up the eligible termination payment and other details you will need when entering this income in the tax return.

 To understand we must take a fiscal view.

 In recent decades, the government's budget deficit has come to be accepted as a measure of its economic rectitude.

Because the biggest component of budget expenditures is social security payments (including age pension payments) an obvious way to bring down the amount of government expenditures was to encourage people to arrange for their own pensions, thereby forgoing a government pension.

 Now put yourself into the shoes of a taxpayer about to retire on 29/6/83.

You could take a superannuation pension, which would be taxable and render you ineligible for the age pension....

Or you could take a lump sum, only 5% of which would be taxed (Ignore the holiday and long service leave payments for the moment).

You could use this to purchase an expensive apartment in some growth area somewhere on the coast, which will appreciate in value and collect the age pension each fortnight.

It was obvious that many taxpayers were adopting the latter course so it was decided to make pensions more popular by taxing the full amount of the sum received on retirement.

As with the taxation of accrued holiday and long service leave entitlements, it was decided that the change should only affect lump sums accrued after the time of announcement (or close thereto)

Accordingly it will be necessary to calculate the portion of the lump sum which relates to service after 30/6/83 or what we refer to as the 'post 30/6/83 portion'.

The legislation lays down rules for determining the

Calculating the post 30/6/83 portion

Employee retires on 30/6/93 (10 years after 30/6/83).

He had commenced employment on 30/6/53

total service = 40 years

post 30/6/83 portion = 10 years = 1/4 (of which only 5% will be included)

pre 30/6/83 portion = 30 years = 3/4 (which will be included in full)

As well as including only 5% the pre 30/6/83 portion the amount of the lump sum which represents a return of the taxpayer's own contributions made after 30/6/83 will also be excluded...If no tax deduction has been allowed

You may be aware that self-employed taxpayers can claim a deduction for contributions to a fund providing superannuation benefits

(Threshold for 1998 income year was $90,474 but this changes each year)

A rebate is allowed to ensure that the maximum rate of tax payable on the amount received does not exceed the maximum rate but note the Medicare Levy is imposed on such payments so that increases the effective tax rate.

More on this later

You will recall that the motive for the change was to encourage persons to take pensions rather than lump sums if they were offered the choice.

Obviously if a retiring taxpayer does this there will be no eligible termination payment.

However the taxpayer that is not retiring but taking on new employment can not adopt this course. Moreover a retiring taxpayer might not be offered the choice between a pension and a lump sum

Such a taxpayer can use the lump sum to

Certain sums, paid after 1/7/1994, will be exempted from these provisions, because they arise from circumstances outside the control of the taxpayer. These are.....

The 'Early retirement scheme' payments and Bona fide redundancy payments are not eligible termination payments, but this may not be as good as it sounds.

If the payment is less than the maximum allowed to be received by the Income Tax Assessment Act, it will be exempt!

For the 1998 income year, that will be $4,548 plus $2,274 for each year of service with the employer.

Any amounts in excess of these limits are deemed to be eligible termination payments and are taxed accordingly.

A capital gain received on the sale of a small business on the basis that it will be used for retirement (such amounts will have escaped capital gains tax) if it falls within the taxpayer's reasonable benefit limit.

 What is the reasonable benefit limit?

The superannuation provisions of the income tax law provide some generous tax shelters. There are some provisions, which ensure that they are not overly generous. The most notable of these is Reasonable Benefit Limit, which seeks to place a limit on the amount of tax shelter that can be gained by making superannuation contributions. (Refer CCH Master Tax Guide para 11-350)

For the 1998 income year, the reasonable benefit limit for pension is $909,435 and the reasonable benefit limit for a lump sum is $454,718.

Amounts received as death benefits by your dependants, are exempt if they within the pension reasonable benefit limit.

Amounts received as death benefits by persons other than your dependants, are taxed in their hands as eligible termination payments they have received (Confusing? Sure, but that's the way it works!)

If the death benefits exceed the reasonable benefit limit for the deceased, they are treated as excessive components of an eligible termination payment - more on that in the following topics.