Employment Termination Payments (ETPs) are lump sum payments made to employees upon the cessation of their employment.
These payments can arise from various circumstances, including resignation, redundancy, retirement, or dismissal.
Understanding the components and tax implications of ETPs is essential to ensure compliance and optimal tax outcomes.
Components of ETPs
ETPs may include:
- Payments in lieu of notice
- Unused sick leave or rostered days off
- Gratuities or ‘golden handshakes’
- Compensation for loss of job or wrongful dismissal
- Invalidity payments for permanent disability
- Genuine redundancy or early retirement scheme payments exceeding the tax-free limit
- Certain payments made after the death of an employee
- The market value of transferred property, less any consideration given
It’s important to note that ETPs do not encompass:
- Lump sum payments for unused annual or long service leave
- The tax-free portion of genuine redundancy or early retirement scheme payments
- Superannuation benefits
- Foreign termination payments
Tax Treatment of ETPs
The taxation of ETPs depends on the nature of the payment and the timing:
- Tax-free components: Portions related to invalidity or employment before 1 July 1983 are tax-free.
- Concessionally taxed components: Amounts up to the ETP cap ($235,000 for the 2023–24 income year) are taxed at lower rates, depending on the recipient’s age and circumstances.
- Excess amounts: Any portion exceeding the cap is taxed at the top marginal rate of 45% plus the Medicare levy.
To benefit from concessional tax treatment, ETPs must generally be received within 12 months of termination. Payments made after this period may not qualify for favorable tax rates.
Reporting Requirements
Employers must provide a PAYG payment summary – employment termination payment within 14 days of making the ETP. This summary details the taxable and tax-free components, tax withheld, and the relevant payment code. Employees should use this information to complete their income tax returns accurately.
Guiding our clients through the complexities of ETPs involves careful analysis of the payment components, timing, and applicable tax treatments. Ensuring accurate reporting and advising on strategies to maximise tax efficiency are key responsibilities in managing employment termination scenarios.
Why not start a conversation with us and find out how else we can help you and your business with your employer tax obligations?
