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.