Lump Sum Retiring Allowances
Lump Sum Retiring Allowances
A,B,C or D - what are all these lump sum payments?
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.
Lump sum payments are marked A and B and represent payments for LEAVE that an employee has NOT TAKEN before retiring.
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'.
Eligible termination payments will be shown next to the letter 'C'. They represent amounts that can be received for lots of reasons including:
payment from an employer to an employee upon retirement (another way of staying this is…' payments made in consequence of the termination of a taxpayer's employment due to resignation. Death, redundancy or invalidity'
payment from a superannuation fund to a member (or dependant, etc)
payment from a retirement saving account (a kind of 'no frills', personal superannuation fund usually operated by bank)
payment from an approved deposit fund (that's a fund that can hold eligible termination payments for a taxpayer until required - it's also known as a roll over fund)
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)
payment received when a right to a pension is commuted (that means when a pension is 'swapped' for a lump sum of money.)
plus quite a few more (refer CCH Master Tax Guide paragraph 11-000)
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.A special class of eligible termination payments will be shown next to the letter 'D'. They represent amounts that can be received on redundancy or early retirement, and they are NOT included in assessable income!
Why are lump sum retiring allowances taxed differently to other income? Some history!
Until 30/6/83 only 5%
of the capital amount of any allowance, gratuity or compensation paid in a lump sum in consequence of a retirement from or termination of any office or employment was included in assessable income.In other words, if you received a million dollars in your last pay packet before retiring, only 5% of this
was included in your assessable income.All this changed on 30/6/83, but why?
If you are interested, refer to the topic on
eligible termination payments.As with the taxation of eligible termination payments, it was decided that the change to the taxation of accrued holiday and long service leave entitlements should only affect lump sums accrued after the time of announcement of the changed taxing arrangements (or close thereto)
Only 5% of the 'pre 30/6/83 portion'
is included in assessable income.
Amounts received after 30/6/83 are included in assessable income IN FULL if they relate to service after 30/6/83
If the payment you receive when you cease work is for
annual or long service leave you have not taken, then all of it, or 5% of it, must be returned as incomeGot all that? Let's do a quick recap!
There are two types of receipts, which can arise out of a retirement, or termination of some office or employment.
Section 27 A to 27 J of the 1936 Income Tax Assessment Act deal with eligible termination payments
These are all the payments which arise from a retirement....with the exception of ... payments assessed under section 26 AC and section 26 AD.
Section 26 AC and section 26 AD are the two sections which include payments for leave accrued but not taken before retirement ...in other words, the payments which are returned at this item.
Before section 26AC & AD were introduced in 1978, only 5% of any amount which could be described as a 'retiring allowance' had to be included in assessable income
So if a retiring allowance of $100 were received, only $5 would have to be included in assessable income.
Annual leave payments represent no problem - they will always be shown at B and included in full in assessable income.
But long service leave payment entitlements are accrued over the working life of the employee, which may have commenced before 30/6/83.
Accordingly it will be necessary to calculate the portion of the lump sum in lieu of long service leave and show that it item A.
Now put yourselves into the shoes of a taxpayer about to retire before 1978. Let's say you had a month's recreation leave and five months long service leave entitlements...
If you take the total six months leave before you retire, you will be derive the income as you take your leave, and this amount will be included in full in your assessable income.
If you wait until you retire then take your leave, you will have only 5% of the six months wages included in your assessable income. So you can appreciate that most people contemplating retirement would put off taking their holidays in their last year of employment thereby receiving payment in lieu of this leave as part of their retiring allowance
Put simply, section 26(AC) requires payments of annual leave to be included in full in assessable income.
So even if a payment in lieu of annual leave was received as part of the retiring allowance, 100%, not 5%, will be included in assessable income.
Section 26(AD) includes in full....
payments of long service leave accrued after 15/8/78 (15/8/78 is the date of the budget speech in which the introduction of section 26(AD) was announced
it also includes 5% of long service leave accrued before 15/8/78
The method for calculating the long service leave accrued after 15/8/78 is set out in section 26 AD (3) & (3A).
As this calculation will be done when the group certificate is prepared it is not essential that you know how it is performed.....
However should you wish to investigate the matter further the CCH Master Tax Guide gives details at para 11 250
Here is the briefest overview...
The amount is calculated in 3 steps
First ... Find the total number of days
|
Days leave |
= |
Unused leave |
+ |
Used leave |
- |
leave used after 18/8/78 |
Next, find the proportion of these days, which accrued after 15/8/78
|
Service after 15/8/78 |
|
|
|
--------------------------------- |
* |
Days leave |
|
Total service |
|
|
Finally, multiply the days that accrued after 15/8/78 by the amount of lump sum which can be attributed to each day
|
Lump sum |
|
|
|
--------------------------------- |
* |
Leave accrued after 15/8/78 |
|
Unused Leave |
|
|
The rebate allowed under section 159SA
A rebate is granted under section 159SA to ensure that a marginal rate of tax of no more than 30% applies to income assessed under sections 26 AC & AD.
This rebate will be calculated automatically by the Tax Office computer system in producing the assessment. Just return the income at this item and the tax office will do all the rest of the work for you...
The rebate ensures that the amounts included by section 26 AC & AD do not bear tax of more than 30%
In other words, even if inclusion of a lump sum takes the taxpayer into a higher tax bracket the rebate will be allowed to bring the tax applicable to it back to the 30%
(Paragraph 11 250 of the CCH Master Tax Guide contains further details)
Where a sum is included in income by section 26 AC or AD, the maximum rate of tax which can be paid on that amount is ...
1. Nil 2. 24% 3. 29% 4. 30% 5. 40% 6. 49%
Did you say 30%? If so, good.
The same rebate is also allowed against income received as
eligible termination payments which accrued after June 1983.
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