Questions and Answers
What is included in Lump Sum A amounts taxed at a maximum rate of 30 cents in the dollar?
Which lump sum payments are generally shown on a separate PAYG Payment Summary?
What happens when a taxpayer's taxable income exceeds $45,000 regarding Lump Sum A?
Lump sums accrued after what date are included in Gross Payments on the Income Statement?
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Which payments are included in Lump Sum amounts for Item 3R of the tax return?
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What is generally NOT classified as a Lump Sum A payment?
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What is the tax implication for Lump Sum A amounts received resulting from a Bona Fide Redundancy?
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Which of the following statements regarding Lump Sum A payments is true?
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What is the correct tax treatment for Lump Sum B amounts accrued before 16 August 1978?
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What type of termination qualifies for tax-free payments under Lump Sum D?
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Which statement about Lump Sum E is correct?
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What is the maximum tax treatment for Lump Sum payments made due to normal termination post 17 August 1993?
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For a taxpayer to receive Lump Sum B, what is required regarding their employment history?
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Which of the following statements about tax treatment of Lump Sum D payments is correct?
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What happens to Lump Sum E if the employee seeks to receive the lump sum in the year it was accrued?
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What is the tax treatment for long service leave (LSL) accrued after 15 August 1978 when terminated under a genuine redundancy?
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Which of the following is considered a reason under the Code R category for leaving a job?
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How much of the Lump Sum B amount is subjected to tax?
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Study Notes
Lump Sum Payments Overview
- Lump sum payments to employees can be taxable and are often shown on the Income Statement or a separate PAYG Payment Summary as Employment Termination Payments (ETPs).
- Non-ETP lump sums include payments for annual leave, long service leave (LSL), redundancy, early retirement, and prior years.
ITEM 3R - Lump Sum A
- Taxed at a maximum rate of 30 cents per dollar.
- Includes long service leave accrued between 16 August 1978 and 17 August 1993 and unused holiday pay accrued up to 17 August 1993.
- Lump sum A payments due to bona fide redundancy, invalidity, or approved early retirement are included under this item.
- Taxpayers with taxable income over $45,000 get a tax offset, maintaining the 30% tax rate.
- Amounts accrued after 17 August 1993 (except for specific conditions) fall under Gross Payments or Total Gross amounts on the Income Statement and are taxed at marginal rates.
ITEM 3R Codes
- Code R: Indicates leaving employment due to bona fide redundancy, invalidity, or an approved early retirement scheme.
- Code T: Indicates leaving employment for any other reason.
ITEM 3H - Lump Sum B
- Represents long service leave accrued before 16 August 1978.
- Only 5% of this amount is included in assessable income and taxed at the taxpayer's marginal rate.
- For example, a taxpayer with $4,000 in Lump Sum B would declare $200 in assessable income.
Payment Breakdown on Cessation of Employment
-
Annual Leave:
- Up to 17 August 1993: Taxed at a maximum of 30% (Lump Sum A).
- Post 17 August 1993: Not concessional tax treatment, taxed as gross salary.
-
Long Service Leave:
- Up to 15 August 1978: 5% taxed at marginal rates (Lump Sum B).
- 16 August 1978 to 17 August 1993: Taxed at a maximum of 30% (Lump Sum A).
- Post 17 August 1993: Not concessional tax treatment, taxed as gross salary.
-
Genuine Redundancy or Early Retirement:
- Any date: Taxed at a maximum of 30% (Lump Sum A).
Lump Sum D
- Comprises payments due to bona fide redundancy or approved early retirement before age pension age.
- Tax-free up to a specific indexed limit for each employee.
- Classified as non-assessable non-exempt income; thus, not included in taxable income.
- Any excess over the tax-free limit is reported as an Employment Termination Payment (ETP).
Lump Sum E - Income in Arrears
- Payments received in the current year due to back pay will be classified as Lump Sum E on the Income Statement, recorded at Item 24 Category 1 of the tax return.
- A lump sum in arrears tax offset may apply to ensure that tax does not exceed what would have been paid if received in the earning year.
- A detailed schedule must accompany the tax return to break down the payment in arrears for each relevant income year. The ATO calculates the offset based on this breakdown.
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Description
This quiz focuses on the taxation of lump sum payments made to employees, including annual leave, long service leave, and redundancy payments. It will cover how these payments are reported on income statements and PAYG Payment Summaries. Understanding the nuances of these payments is crucial for both employers and employees.
