<i>Digitally altered image: Judy Green</i>

Ensnared … termination payment rules are changing. Illustration: Judy Green

The strategy: To avoid the new tax on golden handshakes.

Which tax is that? The government announced in the budget tougher rules on eligible termination payments that - from July 1 - will reduce the tax concessions on payments received when leaving a job, commonly known as golden handshakes. The tougher rules won't apply to genuine redundancy arrangements, invalidity or compensation due to an employment-related dispute or death.

How will it work? The head of technical services for ipac Securities, Colin Lewis, says under the present rules eligible termination payments are taxed at a maximum rate of 15 per cent if you're over preservation age (55 at present) and 30 per cent if you're not up to an indexed cap of $165,000 this year and $175,000 next year. Any excess is taxed at the 46.5 per cent top tax rate.

From July 1, your golden handshake will be added to your total taxable income and only the amount that takes your income up to $180,000 will receive the concessional tax treatment. So, if your income is $150,000 and you receive a $50,000 payment, you'll get the concessional tax treatment only on the first $30,000. The other $20,000 will be taxed at 46.5 per cent.

To make things even more complicated, Lewis says the current transitional rules for eligible termination payments relating to employment contracts that were in place in May 2006 will also come to an end on June 30. These rules allow you to roll the payment into super and pay just 15 per cent tax or, if you take the cash, to be taxed at 31.5 per cent on the amount between $165,000 and $1 million.

The bottom line, Lewis says, is that you could be paying a lot more tax on your termination payment after July 1.

So what can I do to avoid the extra tax? If you are expecting a termination payment, Lewis says you need to talk to your employer about whether it can be paid before June 30 - particularly

if it relates to a long-term job and you'll be eligible for the transitional tax treatment.

Even if you're not eligible for the transitional rules, he says it is still worth bringing forward a golden handshake. He says someone over 55 earning $200,000 would pay $8250 tax on a golden handshake this financial year, but $14,250 if they receive it on July 1.

Genuine redundancy payments not affected by the transitional rules will still receive their current tax concessions after June 30 and will not be affected by the measure. In fact, you might even be better off waiting to receive the payment to take advantage of the rise in the indexed limit for the tax concessions to $175,000.

So it is important to get advice now to determine whether your payment is better received before or after the June 30 deadline. The head of technical services for MLC, Gemma Dale, says the tax consequences of when you receive the payment could be enormous and there is uncertainty about the details of whether all of a redundancy payment will be excluded under the new rules.

What's the difference between a golden handshake and a redundancy payment? Can't my payout just be structured as a redundancy to avoid the tax? Lewis says there are strict rules on what constitutes a redundancy payment.

Basically, your job must no longer exist and there can be no agreement to re-employ someone else. So you're not going to get far with a redundancy claim if you're a senior executive in an essential position.

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