Question of the month

Impact of re-contribution strategy on the taxation of ETPs

Article published on: 30-01-2023

My client is turning 60 in July 2023. He retired on 1 January 2023 and received a taxable employment termination payment (ETP) of $150,000. His other taxable income this financial year is estimated at $20,000. His super balance is $500,000, (100% taxable (taxed element) component) and he’s not in a bring forward period. He intends to retire permanently and meets a condition of release. If he withdraws $230,000 from super and re-contributes the amount as a non-concessional contribution (NCC) in this 2022/23 financial year, what impact would this have on the taxation of the ETP?

Answer

If the client withdraws a super lump sum of $230,000 (100% taxable component), the amount is included in their assessable income. While no tax is payable, a tax offset ensures no tax is paid for the amount within the low rate cap. However, the super lump sum reduces the $180,000 whole-of-income (WOI) cap to nil so that any ETP will exceed the WOI cap. Any ETP amount exceeding the WOI cap is taxed at 47% including Medicare levy. Consequently, the client could pay $70,500 ($150,000 x 47%*) on their ETP.

The client could instead defer the re-contribution strategy to the next financial year (2023/24) to ensure the superannuation lump sum withdrawal is not included in the WOI cap.

Explanation

Taxation of the taxable (taxed element) of a super lump sum

Where a super lump sum is withdrawn and the client has attained preservation age but is less than age 60, the taxable (taxed element) component is included in their assessable income. A tax offset ensures no tax is paid on the taxable component up to the low rate cap (lifetime limit is $230,000 in 2022/23). The amount exceeding the low rate cap is taxed at a maximum of 17%*. 

Tax concessions for ETPs within the WOI cap

The client received an ETP which is subject to the WOI cap. The WOI cap is $180,000 (non-indexed) less other taxable income earned throughout the financial year (excludes the taxable ETP). ETPs within the WOI cap are concessionally taxed at:

• up to 32%* for those under preservation age, and 
• up to 17%* for those who have reached preservation age. 

As the $150,000 ETP is less than the $160,000 WOI cap, the tax on the ETP is $25,500, calculated as $150,000 x 17%*. This is $45,000 (ie $70,500 - $25,500) less than if the super lump sum is withdrawn in the current year.

If the client defers their withdrawal and re-contribution strategy to next financial year or when they attain age 60, the WOI cap is not further reduced in the current financial year. In addition, where the super lump sum is withdrawn after attaining age 60 the amount is tax free (not assessable income) and does not impact the WOI cap.

Other considerations

The client may make NCCs up to the annual cap in the current financial year to ensure their eligibility to trigger the bring forward NCC cap next financial year. The client may also make personal deductible contributions within the concessional cap to reduce any taxable income with both options.

*Includes 2% Medicare levy.