Tax-free component of ETPs

An ETP has a tax-free component if part of the payment relates to:

• employment before 1 July 1983
• invalidity.

The tax-free component may include both of these. The remainder of the ETP is the taxable component.

You should:

• record the taxable component and any tax-free component on the employee's income statement or ETP payment summary
• not withhold tax from the tax-free component.

Employment before 1 July 1983

If part of the ETP relates to employment that occurred before 1 July 1983, the amount to include in the tax-free component is worked out as follows:

• Step 1: Subtract the invalidity part (if any) from the ETP
• Step 2: Multiply the amount at Step 1 by the number of days of employment before 1 July 1983 then divide by the total number of days of employment to which the ETP relates.

Invalidity

An invalidity segment is part of an ETP that's paid because the employee sustained a permanent disability. It's not taxable. An invalidity segment can be paid if both conditions are met:

• Employment ceased as a result of ill health.
• Two medical practitioners have certified that it is unlikely the employee can ever be gainfully employed in the capacity for which they are reasonably qualified.

A death benefit ETP can't include an invalidity segment.

The invalidity segment of the ETP represents the time between the day employment stopped and the day the employee would have retired. It's worked out as follows:

• Amount of ETP × [Days to retirement ÷ (Employment days + Days to retirement)]

Notes:

• 'Days to retirement' are the number of days from the date of termination to the day the employee would have retired. This is generally the day the employee turns 65 or when they would have completed their period of service.
• 'Employment days' are the number of days of employment up to the date of termination.

For more information see Employment termination payment with an invalidity segment worksheet.