Understanding Lump Sum Payments in Australia
What Are Lump Sum Payments?
A lump sum payment is a one-time payment made by an employer to an employee for specific reasons such as termination, redundancy, unused leave, or disability. These payments are classified into different categories by the Australian Taxation Office (ATO), and each has unique tax treatment.
Types of Lump Sum Payments and Their Tax Treatment
1. Lump Sum A – Unused Annual Leave & Long Service Leave
Lump Sum A applies when an employee receives unused annual leave or long service leave upon termination.
Tax Treatment:
-
If the leave is from genuine redundancy, early retirement, invalidity, or compensation, a concessional tax rate applies.
-
Otherwise, the payment is taxed at marginal tax rates.
Example:
Emma, based in Melbourne, resigns after 7 years of service and receives $8,000 for unused annual leave. Since it’s a voluntary resignation, this amount is taxed at her marginal tax rate.
2. Lump Sum B – Unused Long Service Leave Pre-16 August 1978
Lump Sum B applies when an employee receives unused long service leave that was accrued before 16 August 1978.
Tax Treatment:
-
Only 5% of the amount is taxable at marginal rates.
Example:
John, an employee in Hobart, receives $10,000 for long service leave accrued before 1978. Only $500 (5% of $10,000) is taxed at his marginal rate, making it a tax-effective payment.
3. Lump Sum D – Tax-Free Disability Payment
Lump Sum D applies when an employee permanently stops working due to disability.
Tax Treatment:
-
The full amount is tax-free and does not count towards taxable income.
Example:
David, a chef in Launceston, is forced to retire early due to a permanent injury. His employer provides a $50,000 disability benefit, classified as Lump Sum D, meaning it is completely tax-free.
4. Lump Sum E – Redundancy & Early Retirement
Lump Sum E is paid for genuine redundancy, early retirement, or invalidity.
Tax Treatment:
-
A portion of genuine redundancy payments is tax-free, calculated as:
Base amount ($11,985) + $5,994 × years of service (for 2023-24). -
Any excess is taxed as an Employment Termination Payment (ETP).
Example:
Sarah, a marketing executive in Melbourne, is made redundant after 10 years. She receives a redundancy payment of $90,000.
-
Her tax-free limit = $11,985 + ($5,994 × 10) = $71,925.
-
$71,925 is tax-free, and the remaining $18,075 is taxed as an ETP.
Marginal Tax Rate and Lump Sum Payments
Lump sums above tax-free limits are taxed at the employee’s marginal tax rate, which depends on their total taxable income.
2023-24 Marginal Tax Rates in Australia:
| Taxable Income ($) | Tax Rate |
|---|---|
| $0 – $18,200 | 0% |
| $18,201 – $45,000 | 19% |
| $45,001 – $120,000 | 32.5% |
| $120,001 – $180,000 | 37% |
| Over $180,000 | 45% |
Example:
If Michael in Hobart earns $80,000 and receives a $10,000 lump sum, his marginal tax rate is 32.5%, meaning he will pay $3,250 in tax on the lump sum.
Why Understanding Lump Sum Payments Matters?
✔ Helps with tax planning and maximizing tax-free portions.
✔ Ensures correct tax withholding from employers.
✔ Important for employees facing redundancy, retirement, or disability.
For expert tax advice and bookkeeping services in Tasmania and Melbourne, contact BookBrite Advisors today. Our team specializes in managing lump sum payments, tax planning, and compliance with ATO regulations.
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Disclaimer: The information provided in this article is for general informational purposes only and does not constitute financial, tax, or legal advice. While we strive to keep the content accurate and up-to-date, tax laws and regulations may change. We recommend consulting a qualified tax professional or financial advisor before making any financial decisions related to lump sum payments.
