Maximising super with a termination strategy

John Ciacciarelli

Currently, it is possible to rollover employer sourced eligible termination payments (ETPs) into superannuation to defer ETP tax. But, from July 1, 2007, the Government will require all employer termination payments to be cashed, subsequently incurring tax.

An exception to this are ETPs specified under an employment contract existing as at May 9, 2006. Under transitional arrangements, these can be rolled over into super up to June 30, 2012.

Termination and rollover strategy for 2006-07

However, where the exception doesn’t apply and if there is flexibility in the termination date, people should consider bringing forward their termination of employment into the 2006-07 tax year to reduce tax and retain the benefits in the tax-friendly super structure.

This strategy works best for employees expecting to terminate employment over say the next one to two years, where their employer termination payment is expected to exceed $140,000.

Table A (please see Money Management p21 February 1, 2007) compares the current and proposed maximum tax treatment of cashed employer termination payments.

Of course, in a practical sense, an early termination may cause a loss of other entitlements, such as salary, annual leave, long service leave, bonuses and super guarantee contributions.

It may also reduce potential completed years of service for any tax-free amount under a bona-fide redundancy or approved early retirement scheme.

Therefore, the savings in tax need to be considered in light of the loss of other employment benefits.

Contribution work-test

The Australian Prudential Regulation Authority (APRA) has recently advised that for contribution rule purposes the rollover of an employer-sourced ETP into a superannuation fund is now to be treated as a “contribution”.

This means that if a person is aged 65 to 74, they must meet the contribution work test (40 hours over a consecutive 30-day period) to rollover their employer sourced ETP into superannuation. It follows that a fund cannot accept this type of ETP if the person is over 75.

The industry is seeking clarification from Government as to whether this new APRA view is to be maintained.

Transitional arrangements

Transitional arrangements apply that can enable payments that result from written contracts, agreements or employment laws (existing at May 9, 2006) to be rolled over. Such employer termination payments can continue to be rolled into superannuation up to June 30, 2012.

The legislation currently before Parliament dealing with the rollover of these ETPs may require some clarification.

In broad terms, the taxable component of amounts rolled over will be treated as taxable contributions attracting the usual 15 per cent tax in the super fund. However, they only count against the $50,000/$100,000 limit on concessional contributions where apparently all ETPs during the transitional period exceed a $1 million unindexed threshold.

If the ETP is cashed, the maximum tax treatment in Table B applies. (Please see Money Management p21 February 1, 2007)

John Ciacciarelli is technical services manager at AMP Technical and Professional Services