The Government has unexpectedly announced a limit to the availability of the Employment Termination Payment tax (ETP) offset. The offset currently ensures that ETPs are taxed at a maximum rate of 15% for those over preservation age (between 55 and 60 depending on the employee’s date of birth) and 30% for those under preservation age up to an indexed cap (currently $165,000).
From 1 July 2012, only that part of an affected ETP (including “golden handshakes”) that takes an employee’s total annual taxable income (including the ETP) to no more than $180,000 will receive the tax offset. Amounts above this cap will be taxed at the employee’s marginal tax rate.
Whilst existing arrangements will remain for ETPs relating to genuine redundancy, this change will otherwise significantly impact executives who have structured golden handshakes / severance packages into their employment contracts. We await notification on the related grandfathering provisions.
Source: Page 35, Budget Paper No 2 2012-2013.
Please note our comments above are based on Budget proposals as announced on 8 May 2012. They should not be regarded as final until relevant legislation has been passed.
