Eligible termination payments, key points to understand
If you have been doing (as you should) your homework and researching on your super fund you might very well have come across the term “eligible termination payments” or maybe you are about to receive a termination payment, either way it is in your interest to understand what it is and how it affects your super and your tax.
Put simply, eligible termination payments are lump sums that receive special tax treatment or tax concession. This means you pay less tax than you normally would when you receive your eligible termination payment (ETP).
When can you receive an eligible termination payment?
As a general rule super funds cannot be accessed unless certain, rather strict, conditions are met. If you access your super fund outside these special circumstances you will pay full tax on your payment as if it were a normal part of your income.
However you may receive an Eligible Termination Payment (ETP) if:
- You are moving or combining super savings into one account, fund or policy.
- You turn 65 and your super fund starts paying your superannuation benefits.
- Have an employer sponsored fund that pays out your super savings when you change jobs or your employment is terminated.
- If you retire early due to a permanent disability.
- Change to another industry and your previous industry fund’s rules require you are paid your super benefits.
What to do when you receive a eligible termination lump sum?
You have two main options when receiving an ETP, either take the cash or rollover the money into another complying super fund.
How will you know if your lump sum is an eligible termination payments.
It is your superannuation fund that decides if your transaction or benefits are an ETP or not? As a rule of thumb all lump sum payments from superannuation funds are ETP.
How will I know if I am to be paid a lump sum?
In most cases your super fund will contact you and inform you of any payments that are about to be made. If you are running your own super fund you will be responsible for knowing which super fund must pay out benefits or in the case that you use a “master” super fund to manage your personal fund they will inform you.
Once you are informed that you are going to receive an eligible termination payment you have 30 days to decide what to do. If you are under another super fund, the fund might ask you to decide earlier if that is reasonable.
The two main options you have when deciding what to do with you ETP is to either cash in the payment or roll it over to another super fund.
You will not receive an ETP notice if you have already provided enough instructions on what to do or if the ETP you are to receive is from the death of another person. This type of ETP cannot be rolled over and must be paid in cash.
Growing your super fund is probably the most important economic decision you will make. Growing old without money is not fun, now is the time to plan for our retirement savings. Why is that? Saving enough to live the 20 to 30 years we will hopefully survive after retiring is not easy. The best way, certainly the safest way to save for old age is to invest in a medium to low risk stock fund and let compound interest do its job.
Compound interest is simply the concept of earning interest on interest and is responsible for the high returns investment funds reap throughout long periods of time. To illustrate if you invest $100 in a compound interest account at %10 a year and just leave it there you will earn $110 in the first year, $121 the second and so on. It might not seem like a lot but over years and with constant deposits in the fund and by starting early in our life we can all be millionaires by the time we reach retirement age.
The current Superannuation system set in place provides great incentives and handouts to those who are willing to save for the future.
These incentives include contributions by employers which are required to contribute a percentage of your wage towards your superannuation, personal contributions that can be tax deducted and co-contributions which are paid by the government. Super co-contributions will be the main subject of this article, more precisely how to calculate your super fund co-contributions.
First of all, what are super co-contributions?
Super co-contributions are contributions paid into your super fund by the government. These payments are designed to match every dollar you deposit in your fund as a personal contribution where you don’t claim a tax deduction. Remember how your parents might have encouraged you to save for a bicycle or some other thing you wanted and told you they would match any amount you saved. Your parents did this to train you and encourage saving, which is exactly what the government is trying to do.
However, as you might have expected there are limitations on how far the government will go with co-contributions and who qualifies for this benefit.
Eligibility for co-contribution is simple to understand. You must:
a) Make personal contributions to your super fund by the 30th of June of each year.
b) You total income (wages, rent, interest and other sources of income) must be less than $60,342, although this will change yearly in line with average wages.
c) You are under 71
d) 10% or more of your income comes from employment, the running of a business or both.
e) You lodge a tax return.
If you qualify for co-contribution there is not much you need to do in order to receive it, simply make a contribution to your complying super fund before the 30th of June and file a tax return. The tax office will do the rest.
There is one small snag you must remember you can only claim co-contribution for payments you make to your super fund you don’t claim tax deductions on. Not a bad problem to have really, choosing between getting double what you pay and deducting what you pay from your tax payments.