What is an approved deposit fund?
27 July 2018
An approved deposit fund is a type of eligible rollover fund designed to handle employment termination payments – here’s how it works.
When you leave your job, you may receive a particular kind of payout as a result of your employment being terminated. In this case, you may decide to employ the use of an approved deposit fund, which can hold onto and invest such payments until you reach a condition of release.
What’s an employment termination payment?
When you cease working for a particular employer, you may receive an employment termination payment (ETP). This can take many forms, like severance pay, unused sick leave or a payout upon the death of the employee. The Australian Taxation Office (ATO) has produced the below chart to determine if a payment is classified as an ETP.
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| Payments that are ETPs | Payments that are not ETPs |
|---|---|
| A gratuity or golden handshake | Accrued leave payments for unused annual leave and long service leave |
| Genuine redundancy or early retirement scheme payments above the tax-free limit | Genuine redundancy or early retirement scheme payments up to the tax-free limit |
| Severance pay | Salary, wages, allowances, bonuses and incentives owing to the employee for work done or leave already taken |
| Non-genuine redundancy payments | Super benefits (for example, a lump sum or income stream from a super fund) |
| Payments in lieu of notice of termination | Foreign termination payments |
| Unused rostered days off (RDOs) | Certain payments for restraint of trade |
| Unused sick leave | Certain payments for personal injury if you are compensated for your inability to be employed |
| Compensation for loss of job | Employee share scheme payments |
| Compensation for wrongful dismissal, provided it is paid within 12 months of the actual termination of employment | An advance or loan |
| Payments for loss of future super payments | |
| Payments arising from an employee’s termination because of ill health (invalidity), other than compensation for personal injury | |
| Lump sum payments paid on the death of an employee |
Source: ATO
According to the ATO, these payments may attract taxation at a lower rate than other income, up to a certain cap, and it is also subject to other rules regarding how it can be invested. The exact rules can be quite complicated and depend on a host of factors. However, these details will usually be determined by your employer prior to the payment being made.
Can I use an approved deposit fund?
If you receive a termination payment from your employer, then you may be able to transfer it into an approved deposit fund, where it will be invested on your behalf – similarly to a regular superannuation fund. There it can provide you with investment earnings.
The ATO also notes that termination payments can only be transferred to approved deposit funds, and not standard super funds. Further, approved deposit funds can only accept eligible termination payments as contributions, and not other types of contributions that you can make to your regular super fund. Money in an approved deposit fund must be payed out once the owner reaches the age of 65, and cannot be payed as a pension, but only as a lump sum.
The tax treatment and options to deal with employment termination payments and approved deposit funds can be quite complex, so it may be worthwhile to speak to a qualified financial advisor before investing in such a fund.
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