In the business world, employees can leave your business for various reasons. Sometimes, you may have to step in and terminate their employment (due to circumstances). At other times it could be a result of redundancy or resignation. Regardless of the how or why employers who terminate their employee’s positions must be aware of a critical obligation that they must fulfil -employment termination payments.
If you have your employment terminated as an employee, you may be eligible for employment termination payments (ETP). These payments form a part of your final payment, usually paid out as a lump sum or several lump sums. The employee’s termination circumstances, age and type of payment determine the tax treatment of ETPs.
Components of ETPs
- Unused rostered days off
- Unused sick leave
- Payment in lieu of notice
- Compensation for loss of a job or wrongful dismissal
- Severance or gratuity packages
- Redundancy payments or early retirement scheme payments which exceed the tax-free threshold
- Invalidity payment, such as permanent disability.
- Death benefits that are paid to another person as a result of the death of an employee.
For a payment to be classified as an ETP, there must be an official’ termination of employment. Termination of employment can result from dismissal, redundancy, employee resignation, retirement, or unforeseen circumstances such as illness or disability.
The tax rate paid on ETPs will depend on the type of payment that the employee receives. If a part of the payment is for invalidity, it will have a tax-free component. A concessional tax rate is available for the balance up to a cap.
It is essential to be aware of the special tax treatment and differing caps on concessional treatment of ETPs. For instance:
Whole-of-income cap: This is the tax payable on an ETP if an employee earns more income in the same financial year (e.g., getting a new job).
ETP cap: This cap applies to all ETP and has a threshold that is indexed annually. The ETP tax rate varies depending on the age of the employee. The maximum tax rate for employees over the preservation age is 7%. The maximum tax rate if the employee is under the preservation age is 32%.
An Employee can apply a concessional tax treatment for ETPs received within 12 months of termination. The rules around the concession caps for these kinds of contributions may differ according to the type of payment received.
Unused Annual and Long Service Leave
An Employee may receive unused annual and long service leave upon termination. Considerations for the tax treatment are:
- The process of termination
- The timing of the leave accrual (when it was)
However, these payments are not generally classified or determined as being a part of the ETP.
Employees may also request an employment separation certificate from their employer. The employee can present the certificate to Centrelink when applying for unemployment benefits to assist them during their subsequent job-seeking process. Employers are legally required to issue upon request – failure to do so may result in harsh penalties.
Employers should also provide an ETP payment summary as part of an employee’s final payment summary. The payment summary indicates the payment calculations, as well as any tax on these payments.
Have you been put into the position of having to terminate the employment of your employees? We can assist you with navigating employment termination payments and the taxable concessions that those payments may be subject to. Come start the conversation with us.
