Termination payments tax: Excessive component of an employer eligible termination payment

Is the 'excessive component' of an employer eligible termination payment (ETP) subject to the termination payments surcharge under subsection 8(1A) of the Termination Payments Tax (Assessment and Collection) Act 1997 (TPT Act)?

No. The 'excessive component' of an employer ETP made after 7.30 pm by legal time in the Australian Capital Territory (ACT) on 22 May 2001 is not subject to the termination payments surcharge in accordance with subsection 8(1A) of the TPT Act.

A taxpayer receives an employer ETP on 23 May 2001. The ETP is taken in cash and includes an excessive component that is subject to income tax at the highest marginal rate. The taxpayer subsequently receives a termination payments surcharge assessment in relation to the ETP as their adjusted taxable income (ATI) for the 2001 financial year exceeds the surcharge threshold.

Subsection 8(1) of the TPT Act states that subject to subsection 8(1A), termination payments surcharge is payable on termination payments made to or for a taxpayer. Subsection 8(2) provides that surcharge is only payable if the taxpayer's ATI for the financial year in which the payments are made is greater than the surcharge threshold for that financial year.

A 'termination payment' is defined in subsection 7(2) of the TPT Act to mean the retained amount of an employer ETP made after 7.30pm on 20 August 1996. Under section 31 of the TPT Act, 'retained amount' has the same meaning as that given by section 27AC of the Income Tax Assessment Act 1936 (ITAA36). This is essentially so much of the ETP that is taken in cash and not rolled-over.

Subsection 8(1A) of the TPT Act specifies that in the case of a termination payment made after 7.30pm by legal time in the ACT on 22 May 2001, surcharge is not payable on any part of a termination payment that the Commissioner of Taxation has determined under section 140R of the ITAA36 to be in excess of the taxpayer's reasonable benefits limits. Accordingly, the excessive component of a termination payment made on 23 May 2001 is not subject to the surcharge. The surcharge that is payable on the termination payment is calculated in accordance with subsection 9(3) of the TPT Act.

However where the employer ETP is made at or before 7.30 pm by legal time in the ACT on 22 May 2001 and includes an excessive component, surcharge is payable on the post-20 August 1996 portion of the termination payment (inclusive of the excessive component) in accordance with subsection 9(2) of the TPT Act. Note: The view contained in this ATO ID will only apply to payments made in income years up to and including the 2004-05 income year as the termination payments surcharge cannot be imposed on payments made in the 2005-06 and later income years.