In Australia, an employment termination payment (ETP) is an essential aspect of employment law. When an employee is voluntarily or involuntarily terminated from their job, they may be entitled to receive a payment from their employer. An ETP can include various types of payments, such as:
- Unused annual leave
- Long service leave
- Genuine redundancy payments; and
- Certain types of compensation payments
- Life benefit termination payments
- Death benefit termination payments
These payments are subject to different tax treatment, depending on the circumstances of the termination. Let’s take a closer look at an employment termination payment, their tax treatment, and why they are important in employment law matters.
Importance of Employment Termination Payments
ETPs are important in employment law matters for several reasons. Firstly, they can have significant financial implications for both the employer and the employee. If an employer fails to pay an employee’s entitlements under an ETP, they may be liable for:
- Breach of contract; or
- Underpayment of wages
On the other hand, if an employee fails to disclose their employment termination payment correctly on their tax return, they may be:
- Liable for penalties; and
- Interest charges from the Australian Taxation Office (ATO)
Secondly, ETPs can also have implications for employment-related disputes. For example, if an employee claims unfair dismissal, their ETP may be taken into account when assessing the compensation they are entitled to. Similarly, if an employer claims that a redundancy was genuine, they may need to demonstrate that they paid the employee’s entitlements under the ETP rules.
Tax Treatment of Employee Termination Payments
The tax treatment of an employment termination payment depends on the type of payment and the circumstances of the termination. According to the ATO, ETPs can have up to three parts, each with a different tax treatment. These are:
- Tax-Free: Certain components of an ETP are tax-free, meaning they are not subject to income tax. This includes specific payments such as genuine redundancy payments and early retirement scheme payments. A life benefit termination payment and death benefit termination payment are part of ETP but may be taxed differently.
- Concessionally Taxed: Some parts of an ETP are concessionally taxed. This means that they are subject to a lower tax rate compared to an individual’s marginal tax rate. These concessional taxed components are applicable if the ETP is received within 12 months of the termination.
- Taxed at Marginal Tax Rate: The remaining portion of an employment termination payment is taxed at an individual’s marginal tax rate. The tax rate depends on the type of payment received and is applicable in the year the payment is received. It’s important to note that ETPs cannot be rolled over into a superannuation fund.
Amounts To Include and Exclude From an ETP
|An ETP can consist of various components, including:|
• Payments for unused sick leave or unused rostered days off
• Payments in lieu of notice
• Gratuities or ‘golden handshakes’
• Employee’s invalidity payment (for permanent disability, other than compensation for personal injury)
• Compensation for loss of job or wrongful dismissal
• Genuine redundancy payments
• Early retirement scheme payments that exceed the tax-free limit
• Certain payments made after the death of an employee
• Market value of property transferred (less any consideration given for the transfer of this property)
|On the other hand, ETPs do not include:|
• Lump sum payments for unused annual or long service leave
• The tax-free part of a genuine redundancy payment or early retirement scheme payment
• Superannuation benefits (e.g., lump sum or income stream from a super fund)
• Foreign termination payments
• Accrued Leave
When an employment termination payment is paid, an employer may also include any unused annual or long service leave payments. However, these lump sum payments for unused leave are not considered part of the ETP. They are recorded separately on an individual’s income statement or PAYG payment summary.
The tax withholding rate for lump sum payments of unused leave depends on factors such as the type of termination, date of accrual, and type of leave.
Employment Termination Payment: Other Amounts
In addition to redundancy benefits or accrued leave, employers may provide other payments that are not classified as such. These can include gratuities, golden handshakes, and severance pay. The ATO treats these payments as part of the ETP and applies concessional tax rates to them. Some payments may be tax-exempt if employment terminates due to ill health or payment related to work before July 1, 1983.
Employee Termination Payment: The Process
If you find yourself facing employment termination, it’s essential to understand the process of receiving an ETP. Here’s a step-by-step guide to help you navigate through the procedure:
- Review your employment contract: Review your employment contract or any relevant agreements to understand your entitlements in case of termination. Look for provisions related to annual leave, long service leave, redundancy, and the minimum notice period or periods.
- Seek legal advice if necessary: If you have any concerns or questions about your entitlements or the termination process, consider seeking legal advice. Employment lawyers can provide guidance based on your specific circumstances and help protect your rights.
- Negotiate with your employer: If you believe you must receive specific ETPs, or if you’re facing challenges related to your termination, you may choose to negotiate with your employer. Engage in open communication to address your concerns and reach a mutually acceptable agreement.
- Understand the tax implications: An employment termination payment can have significant tax implications. Therefore, it’s crucial to understand how different payments are treated for tax purposes. Consult with an employment lawyer to ensure accurate reporting and compliance with tax regulations.
- Lodge your tax return correctly: When lodging your tax return, ensure that you correctly report your ETP to the ATO. Provide all necessary information and documentation to accurately reflect the payments received and their corresponding tax treatment.
Our Employment Lawyers
It’s difficult and challenging to understand employment laws regarding ETPs. Hence, it’s essential to seek legal advice from experienced lawyers about an employment termination payment. We at JB Solicitors can ensure that we protect your entitlements, and that you understand your rights and obligations. Our team of lawyers can provide guidance on issues such as:
- Tax implications
- Payment structure; and
- Compliance with ETP rules
- Calculating final pay
Message us today for all your employment law matters.