ap_etp03

Payments in respect of early retirement, redundancy or invalidity

It all changed after 1 July 1994

Prior to 1 July 1994

Concessional component is defined as that part of the eligible termination payment which can be attributed to one of the following:

Bona fide redundancy payment

Approved early retirement scheme payment

Invalidity payment

and only 5% of the concessional component is included in assessable income.

After 1 July 1994

Bona fide redundancy payment and

Approved early retirement scheme payment

are tax free up to a specified limit. Any excess over this limit is treated as an ordinary eligible termination payment.

Invalidity payment are exempt from tax.

Approved early retirement scheme payment-section 27E

This is defined as a payment which is described in sec 27E.

Sec 27E(4) defines the excess of the eligible termination payment over what the retiring taxpayer might reasonably have expected to receive on termination under more usual circumstances as an approved early retirement payment...If

(a) it was made under an approved early retirement scheme.

(b) The retirement was 'premature'.

(d) There is no 'under the counter' agreement to re-employ the taxpayer.

You can read through the necessary pre-conditions for approval of a scheme as an 'early retirement scheme' in sec 27E(1)-it will involve an enterprise shedding labour as part of an attempt to make itself more efficient.

Paragraph 11-130 of the CCH Master Tax Guide also contains details

Bona fide redundancy payments-section 27F

Section 27F(1) defines the excess of the eligible termination payment over what the redundant taxpayer might reasonably have expected to receive on termination had he voluntarily retired, as a bona fide redundancy payment. Para 11-140 - CCH Master Tax Guide contains further details.

Invalidity payments - section 27G

Section 27G provides a formula to calculate the amount of the eligible termination payment which can be defined as an invalidity payment and thus form part of the concessional component.

Before sec 27G can apply an eligible termination payment must be made in respect of a termination which occurred by reason of a taxpayer's physical or mental incapacity to engage in his employment before the 'last retirement date' - that term is defined in section 27A

'Last retirement date' is defined in sec 27A as either....

The date by which the taxpayer's employment would necessarily end but for...his invalidity-this will be the normal retiring age for that employment. or ..

Age 65 if no such retiring age exists in the taxpayer's employment.

Para 11-150 - CCH Master Tax Guide contains further details.

To find the proportion of the eligible termination payment which will be included in the concessional component multiply it by the expression B/C, or

period from termination to last retirement date...

Divided by ....

The sum of the eligible service period

Plus

the period from termination to last retirement date.

The following example shows how this benefits the taxpayer.

Take the case of a taxpayer who has to retire at age 45 due to an injury.

Let's say he had commenced employment on 30/6/78-5 years before 30/6/83,

and that the injury occurs on 30/6/88. (5 Years after 30/6/83)

period employed after 30/6/83 = 5 years

total period employed = 10 years

therefore half (5/10) of the lump sum received would be taxed at the concessional rate.

However, if he had worked until age 65 then retired, only 25/30's would have

been included.

Period employed after 30/6/83 = 25 years

total period employed = 30 years

So, the legislation allows the inclusion of the 'notional' period of employment (the time he would have worked but for the injury) in the concessional component

Question:

Which of the following is not part of the concessional component?

1. Bona fide redundancy payment ...

2. Approved early retirement scheme payment ...

3. Invalidity payment...

4. Contributions for which no concessional rebate has been allowed

Did you say 4? If so you are right