Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 3 - Exemption from termination payments surcharge
Outline of chapter
3.1 This chapter explains the amendments necessary to exempt the excessive component of an employer ETP from liability to the termination payments surcharge.
Context of reform
3.2 This measure was announced in the 2001-2002 Federal Budget and is designed to improve the operation of the termination payments surcharge as it applies to employer ETPs, such as redundancies.
Summary of new law
3.3 Currently, where an employer ETP is subject to the termination payments surcharge and part or all of that ETP exceeds the taxpayers RBL, this excessive component is potentially taxable at a maximum rate of 63.5% (top marginal rate plus the Medicare levy plus the termination payments surcharge). This Bill will amend the TPT(A & C)A 1997 to exempt an excessive component of a retained employer ETP from the termination payments surcharge.
| New law | Current law |
|---|---|
| A taxpayer who receives an employer ETP and has an adjusted taxable income for surcharge purposes which exceeds the surcharge threshold, will be surcharged on the amount of the termination payment, less any excessive component , that accrued after 20 August 1996. | A taxpayer who receives an employer provided ETP and has an adjusted taxable income for surcharge purposes which exceeds the surcharge threshold for that year, will be surcharged on the post-20 August 1996 portion of the termination payment. |
| The excessive component will continue to be taxed at the top marginal tax rate plus the Medicare levy. | Where part or all of that employer provided ETP exceeds the taxpayers RBL, that excessive component will be taxed at the top marginal tax rate plus the Medicare levy. |
Detailed explanation of new law
3.4 Subsection 8(1) of the TPT(A & C)A 1997 states that termination payments surcharge is payable on any termination payments made to or for a taxpayer. However, under subsection 8(2) no surcharge is payable unless the persons ATI is greater than the surcharge threshold.
3.5 This Bill inserts a new subsection 8(1A) to exclude an excessive component of an employer ETP from being subject to the termination payments surcharge for termination payments made after 7.30 pm, by legal time in the Australian Capital Territory, on 22 May 2001. [Schedule 3, items 1 and 2, subsection 8(1)]
3.6 An excessive component is an amount determined by the Commissioner under subsection 140R(1) of the ITAA 1936.
3.7 Subsection 9(1) of the TPT(A & C)A 1997 is currently a transitional provision which provides that, for termination payments made before 20 August 2001, only the portion of a termination payment that accrued after 20 August 1996 is liable to the surcharge. However, the existing transitional arrangements are to be made permanent by this Bill (see Chapter 1), with current section 9 being repealed and replaced with a new section 9. New subsection 9(1) provides that section 9 only applies to termination payments made after 20 August 1996. New subsection 9(2) sets out the method of determining the amount of a termination payment made before 7.30 pm, by legal time in the Australian Capital Territory, on 22 May 2001 which is subject to the surcharge. New subsection 9(3) sets out the method of determining the amount of a termination payment made after 7.30 pm, by legal time in the Australian Capital Territory, on 22 May 2001 that is subject to the surcharge. [Schedule 3, item 3, section 9]
Application and transitional provisions
3.8 The amendments to the TPT(A & C)A 1997 to exempt the excessive component from the termination payments tax will apply to payments received after 7.30 pm, by legal time in the Australian Capital Territory, on 22 May 2001. [Schedule 3, item 4]