University Tax Law: Letter of Advice to Carlos on Superannuation & Tax

This case study presents a letter of advice to Mr. Carlos Lewis, addressing his termination payment and superannuation fund tax implications. Carlos, born in 1961, was made redundant in 2018, receiving a termination payment of $75,000, including unused leave. The advice explores relevant Australian tax laws, including the ITAA 1997 and ATO guidelines, particularly concerning Employee Termination Payments (ETP) and superannuation withdrawals. It analyzes Carlos's financial situation, including his self-managed and industrial superannuation funds, mortgage, and income needs. The letter provides detailed guidance on the taxability of his termination payment, the calculation of tax-free thresholds, and the implications of withdrawing funds via super income streams or lump sums. The advice emphasizes factors affecting tax liability, such as preservation age and the components of taxable and tax-free super amounts. The case study concludes with specific recommendations for Carlos, based on his circumstances, to minimize tax obligations and optimize his financial planning for retirement, considering the interplay of ETP, superannuation, and relevant tax regulations.

Running head: LETTER OF ADVICE TO CARLOS
Letter of Advice to Carlos
Name of the Student
Name of the University
Author Note

1LETTER OF ADVICE TO CARLOS
Henry Chapman Associates
ANZ Tower 171 Middlesbrough Street
Sydney NSW 2000
Australia
Mr Carlos Lewis Our Ref: 507
180 Rodney Street 30 th September
2019
Sydney NSW 2000
Australia.
Dear Mr Carlos,
This letter is being sent to you as a follow up on our previous meetings and discussions regarding
your termination payment and the taxation on the amount withdrawn from your superannuation
fund. It is also intended to advice you about the best step that you should take to avoid the
taxability of your retirement funds.
Issue
You were born in 1957 and are 58 years old. In 2018, your job became redundant because
of the internal restructuring by the company in which you had been working since 2013. The
termination payments received by you were $75000. This also consisted the unused leave
payments of $14250. During that year, your total income up to the date you were fired was
$52000. Although you had been fired, you do not expect that you will not be employed anywhere
else. This may be either be full time employment or part time work. You currently hold fully
preserved holdings worth $400000 in a self-managed superannuation fund in which $350000 is a
part of the non-concessional contribution and $50000 is the accumulated earnings on which the
superannuation fund has paid the tax. In your superannuation fund, the majority asset is a
commercial investment property. Although your wife is a member of the fund, she does not
make any contribution towards it. Apart from this, you have $250000 in an industrial

2LETTER OF ADVICE TO CARLOS
superannuation fund. This consists of investment earnings of $125000 and accumulated
concessional contributions of $125000 on which the fund has paid the tax. Your mortgage
currently is $120000 and you need an additional income of $25000 p.a. and $18000 p.a. for
paying the same.
Law
Under subsection 83-175(1) of ITAA 1997, a termination payment constitutes a genuine
termination payment if it is received by the employee due to the reason that his position is
genuinely redundant. As per section 82.130 of ITAA 1997, an Employee Termination Payment
(EPT) is a form of lump sum payment that is received by a person from their employer on losing
their job or the death of another person resulting in the termination of the employment of the
person1. It should be received within 12 months of the death of the person and it is not a payment
covered under section 82-135 of the act. The ATO guidelines state that an ETP includes aspects
of salary like severance pays and gratuities. However, it does not include payments like accrued
annual leaves and redundancy payments that are not chargeable to tax. According to the ATO
rules, the ETP cap is indexed on a yearly basis. For the taxation year 2019-20, this limit after
indexation is available up to $210000. If the payments are more than this amount, then the
highest rate of tax is to be charged on the payments. If the payments are not paid in lump sum
and made on an instalment basis, then the payments previously made to the employees are
reduced from the current redundancy payments. If the termination of the employee takes place
before 1 July 1983, then a part of the income is not chargeable under tax. The tax free amount for
the year 2019-20 is to be calculated using the following formula: Base amount + (service amount
1 "Taxation of Termination Payments". 2019. Ato.Gov.Au. Accessed October 7 2019.
https://www.ato.gov.au/Business/Your-workers/In-detail/Taxation-of-termination-payments/?
page=4#Working_out_and_reporting_the_tax_free_amount.

3LETTER OF ADVICE TO CARLOS
* number of years of service). The base amount and the service amount are indexed on an annual
basis. This amount is not chargeable to tax in a particular financial year. The ATO rules suggest
that the super benefits which are obtained by a taxpayer are subject to certain benefits in a
particular financial year. These include the preserved benefits, restricted non-preserved benefits
and unrestricted non-preserved benefits. If your superannuation holdings are fully preserved, it
implies that all of your preserved benefits relate to the period after 30 June 1999. The
superannuation fund earnings available to you can be withdrawn as either a super income stream
or a super lump stream or as a combination of both. Your tax liability is dependent on the option
that you choose for withdrawing your superannuation funds. If you choose to withdraw your
super funds as a part of the income stream, then you are paid regular amounts on an annual basis
by your fund provider2. These payments need to be made over a period of time and should meet
the minimum applicable funds for a super fund payment. The minimum withdrawal from the
payments for a person who is under 65 years of age is 4% of the amount present in the
superannuation fund. In case the fund holder fails to make the minimum required payments in a
particular financial year, then the income stream for that particular year is presumed to have
stopped. All other payments received from the superannuation fund are taxable as a part of the
lump sum payments for the particular year. The problem with this is that additional taxes may
have to be paid on the lump sum payments. However, it should also be noted that the payments
made by the super fund need not be done at regular intervals and the sum paid to the taxpayers
also need not be the same as long as it meets the minimum threshold of the super income
payments. These super income streams are also known as annuities or pensions in certain cases.
2 "Super Contributions - Too Much Can Mean Extra Tax". 2019. Ato.Gov.Au. Accessed October 7 2019.
https://www.ato.gov.au/Individuals/Super/In-detail/Growing-your-super/Super-contributions---too-much-can-mean-
extra-tax/?page=3#targetText=Non%2Dconcessional%20contributions%20are%20made,taxed%20in%20your
%20super%20fund.&targetText=If%20you%20exceed%20your%20non,have%20to%20pay%20extra%20tax.

4LETTER OF ADVICE TO CARLOS
The other aspect of contributing to an income stream is that the contributions need to be made in
advance to starting the same. This is because once the income stream starts, no further
contributions can be made to the fund until certain special circumstances are met. These suggest
that the person making an additional contribution to the income stream should either be below 65
years of age or between 65 to 75 years of age and be employed gainfully at least on a part time
basis. In case someone wishes to make additional contributions to the superfunds, then the
current income stream should be stopped and a new one should be started in its place. If there is
no problem with the rules of the super income provider, then the amount of payments received in
a year can be altered or stopped altogether. Another option is to start an account-based income
stream3. This income stream is related to the market-linked pensions which began on or after 1
April 2007. In this type of fund, the service provider takes the money invested in the funds and
invests them in the market. The total balance available in the fund fluctuates according to the
performance and the changes occurring in the value of the investments. Every year, the person
can withdraw as much income from their account-based income stream as they want. However,
in case a person is retiring, then there is a limit on the amount that they can withdraw from the
superannuation fund in that particular year. In case of the death of the person, then the amount
remaining in the fund tends to go to the beneficiary that was nominated by the contributor to the
fund. Another option available to you apart from the super income fund is to take your
superannuation payments as a super lump sum. In this case, instead of taking monthly payments,
all of the super amount is taken at once by the person contributing to the fund. Before 1 July
2017, an option was available to the taxpayers to elect one or more super income payments as a
part of the super lump sum payments for taxation purposes. However, since 1 July 2017, this
3 "Withdrawing Your Super and Paying Tax". 2019. Ato.Gov.Au. Accessed October 7 2019.
https://www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/Withdrawing-your-super-
and-paying-tax/?anchor=Howtaxappliestoyoursuper#Lowratecapamount.

5LETTER OF ADVICE TO CARLOS
concession was removed and pensions received on a monthly basis are not treated as lump sum
payments anymore. They come under the definition of the income stream benefits. The super
fund provider may be required to hold the tax from the superannuation payments. The factors
which are essential in determining the amount of tax paid by an individual on the amount of
super funds received by them include the preservation age of the individual and their age at the
time of receiving the payment, whether the benefit accrued by them is tax-free or taxable, the
option between super income and super lump sum payments and the type of super income stream
received by them. Preservation age is a concept in which the persons become eligible to
withdraw their amounts from their superannuation funds. For people born between 1 July 1960
and 30 June 1961, the preservation age is 56 years4. If they become 56 years old, then they are
eligible to withdraw the amounts from their fund. In case of every person’s superannuation fund,
there are two aspects. These are known as the taxable super amount and the tax-free super
amount. Even in case of the taxable super amount, there may exist amount that has already been
taxed by the fund itself and hence, the taxpayer need not pay any taxes on such amount received
from the fund. The time from when the tax is calculated on a contribution also changes on the
basis of the amount withdrawn and the nature of the payment. If the payment is received as a
lump sum, then the tax rates are taken as those existing just before the payment. In case, the
payments are received in the form of super income, then the taxes are charged on the basis of the
time when the payment begins. The tax rates charged on the super payments also vary on the
basis of the nature of the payment opted by the person. If the amount withdrawn is a taxed
element in the income stream, then tax would be levied at the marginal rates of the individual
less 15% tax off-set which the person is eligible to receive. If the amount is withdrawn as a part
4 "Key Superannuation Rates and Thresholds". 2019. Ato.Gov.Au. Accessed October 7 2019.
https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?page=11.

6LETTER OF ADVICE TO CARLOS
of the taxable component as a lump sum payment, then the effective tax rate would be the
marginal tax rate or 17%, whichever is lower5. If the amount withdrawn is a part of the untaxed
element and is withdrawn as a part of the income stream, then the tax charged would be at the
rate of the marginal tax rate of the person. In case where the amount is received as a lump sum
payment of the untaxed component, then the effective tax rate would be charged as high as 17%.
Non-concessional contributions include the payments that are not taxed as a part of the
contribution made to the superannuation fund. This is because they are contributed by the people
from their after-tax income. For the financial year 2017-18, the non-concessional contribution
cap on individuals has been reduced to $100000 from $180000 per year. In case an individual
exceeds this cap, then tax returns would have to be lodged in the year when this cap is exceeded.
Steps to be taken
This section involves an application of the regulations identified above to your situation.
As you were born on 3 March 1961, your age is 58 years. Your preservation age according to the
law is 56 years. Hence, you come under the category of the people who have crossed the
preservation age but are below 60 years of age. As you have lost your job due to a situation that
can be termed as a genuine redundancy, the payment received by you is taxable only to a certain
limit. The unused leave payments of $14250 are not to be included as a part of the payments
received by you. Of the remaining amount, there is a tax free aspect available to you. As you
have been employed in the organisation for a period of 5 years, the tax free amount available to
you is $37,238. On the remaining amount, you are liable to pay taxes in the applicable rate.
However, as they are less than $210000, the highest rate of tax would not be charged on you.
5 "Withdrawing Your Super and Paying Tax". 2019. Ato.Gov.Au. Accessed October 7 2019.
https://www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/Withdrawing-your-super-
and-paying-tax/?
=redirected_calc_lowratecaponsuper&page=3&anchor=Low_rate_cap_amount#Low_rate_cap_amount.

7LETTER OF ADVICE TO CARLOS
The non-concessional contribution made by you to the self-managed superannuation fund is
$350000. As this exceeds the concessional limit of $100000, you are required to state the amount
as a part of your tax returns. You will be liable to pay taxes on $250000 on this amount. If you
choose to withdraw this amount as a part of the super income, you will be allowed an offset of 15
percent on the amount of tax paid by you. However, if you choose to take the income as a part of
a lump sum payment, then you would be liable to pay taxes on the amount received by you at the
rate of 17 percent on the amount exceeding the exempted cap of $100000. As you have reached
the preservation age but are below 60 years of age, a further 205000 exemption is available to
you. The tax on this amount is 0%. On the remaining $45000, you are liable to pay taxes at 17%.
The remaining amount of $50000, on which taxes have been paid by the superannuation fund are
not liable to be charged under the tax rules. In case of the amounts invested in the industrial
superannuation fund, the 50% of 250000, on which tax has been paid by the superannuation fund
are exempt from taxation in your hands to avoid the aspect of double taxation. In case of the
amount contributed through the investment earnings, tax is charged on the amount of $125000
on the basis of the value of the investment.
Conclusion
On the basis of the above discussion, it can be suggested that your leave payments are not
taxed in your hands. In case of the remaining payments received by you, $37238 is exempt from
taxation in your hands and you need to pay tax on the remaining payment. The amount from your
superannuation funds can be used in the payment of your mortgage as you receive tax benefits up
to $305000 on the lump sum payments received by you. However, if you were to receive the
same amount in March 2021, then you would not receive the lower cap benefits. In case of the

8LETTER OF ADVICE TO CARLOS
industrial superannuation, you are liable to pay taxes on $125000. Hence, this amount should not
be used in the payment of the mortgages.

9LETTER OF ADVICE TO CARLOS
References
"Key Superannuation Rates and Thresholds". 2019. Ato.Gov.Au. Accessed October 7 2019.
https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?page=11.
"Super Contributions - Too Much Can Mean Extra Tax". 2019. Ato.Gov.Au. Accessed October 7
2019. https://www.ato.gov.au/Individuals/Super/In-detail/Growing-your-super/Super-
contributions---too-much-can-mean-extra-tax/?page=3#targetText=Non%2Dconcessional
%20contributions%20are%20made,taxed%20in%20your%20super%20fund.&targetText=If
%20you%20exceed%20your%20non,have%20to%20pay%20extra%20tax.
"Taxation of Termination Payments". 2019. Ato.Gov.Au. Accessed October 7 2019.
https://www.ato.gov.au/Business/Your-workers/In-detail/Taxation-of-termination-payments/?
page=4#Working_out_and_reporting_the_tax_free_amount.
"Withdrawing Your Super and Paying Tax". 2019. Ato.Gov.Au. Accessed October 7 2019.
https://www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/
Withdrawing-your-super-and-paying-tax/?
anchor=Howtaxappliestoyoursuper#Lowratecapamount.
"Withdrawing Your Super and Paying Tax". 2019. Ato.Gov.Au. Accessed October 7 2019.
https://www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/
Withdrawing-your-super-and-paying-tax/?
=redirected_calc_lowratecaponsuper&page=3&anchor=Low_rate_cap_amount#Low_rate_cap_a
mount.