The invalidity component of an employee termination payment is determined by a calculation based in the future.
When an employee retires because of permanent disability, the part of the Employment Termination Payment (ETP) which relates to the period until normal retirement date, is the tax free invalidity component.
To be classified as an invalidity payment, the termination of employment must have taken place before the date the employee’s employment would have normally ended. For these purposes, this is referred to as the last retirement date.
If the date cannot be otherwise determined, then age 65 years is taken to be the last retirement date.
What is the disability causing the termination?
The nature of the disability giving rise to the termination of employment includes physical and mental incapacity; either total incapacity, or incapacity for that employment.
The disability must be verified by two medical practitioners as being likely that the employee will never be able to be employed in keeping with their education, training or experience.
Calculation of tax free invalidity component
To calculate the tax free invalidity component of an ETP, the period from actual termination to the last retirement date is compared to the total period (including the period to last retirement date). The resulting ratio is applied to the ETP dollar amount.
For the calculation we need to know the total employment days – the total number days on which the ETP is based.
For continuously employed full time workers this is a readily obtained number calendar days.
Less obviously, for casual or part-time workers, the employment days total is the number of days in the period of employment (not the number of days worked). For seasonal workers, the employment days total is the number of days in each seasonal period of seasonal work.
A = the amount of the ETP in dollars
B = additional days from actual retirement to the last retirement date
C = total employment days PLUS the number of days in B
A x B ÷ C = $Tax Free Invalidity Component
ATO invalidity calculation worksheet
Employment termination payment with an invalidity segment worksheet (NAT 71949) can be downloaded from the Tax Office website here.
Payg withhold rates (taxable component only)
This page was last modified on 2018-12-04