Guide To Payments On Termination Of Employment

Workers can be paid numerous kinds of ‘lump sums’ that are taxed and reported in a different way to typical income. A lump sum is a one-time payment, usually supplied to the employee, instead of repeating payments over an amount of time.

An employment termination payment (ETP) is among these lump sums. This is known as a ‘life advantage ETP’ when it’s paid to an employee. If the employee has actually died, a ‘death benefit ETP’ is paid to their estate.

A work termination payment (ETP) is a lump sum payment made as a result of the termination of a person’s employment.

ETPs have up to three parts:

  • tax-free
  • concessionally taxed (usually taxed at a lower rate than your limited tax rate).
  • taxed at your limited tax rate.
  • The rate of tax you pay depends upon the type of payment you receive. The payment is taxed in the year you get the payment. You can’t roll over your ETP to your superannuation.

If it is gotten within 12 months of your termination, your ETP is concessionally taxed. There are different caps on the concessional treatment of ETPs paid to you or your dependants.

Taxation of life advantage ETPs A life advantage termination payment is a lump sum ETP paid to an employee because of the termination of their employment leaves out termination due to death of the staff member. There are two categories of life advantage termination payments, ‘left out’ and ‘non-excluded’ payments, which affects the quantity of an ETP subject to concessional tax treatment. Left out payments undergo the ETP cap only, while non-excluded payments go through the 

ETP cap and the whole-of-income cap.


Tax Of Eligible Termination Payments.

The rules in regard to what is and is not an employment termination payment and how the benefit is taxed are complicated. This course covers the nature of a real redundancy payment, early retirement payments, life insurance policy payments and the treatment of unused yearly leave and long service leave.

Will settlement on termination of work be assessable as income to the staff member

The tax treatment of compensation payments made on the termination of work depends on the character of the payment. That is, whether it is income or capital in nature.

In a work context, the characterisation of a settlement payment made to a staff member on termination needs the identification of the underlying quantity for which the employer is required to compensate (eg annual leave, notice period).

Common examples.

Some common compensation payments made to staff members on the termination of their employment consist of:.

  • Unpaid earnings, annual leave and long service leave: These payments are in alternative for what would otherwise be common earnings and for that reason are normally assessable as earnings.
  • Payment in lieu of notice: This amount remains in alternative for what would otherwise be an earnings stream throughout the notification duration.
  • Wrongful termination compensation (eg unfair dismissal): This quantity is in replacement for the denial of a right to be lawfully dismissed. This right is capital in nature and appropriately, the payment is capital and not assessable.
  • Settlement for limitation of other rights: An amount got as factor to consider for an individual entering into a limiting covenant will generally be capital in nature.
  • Receiving settlement payments as a lump sum does not prevent the quantity from being considered normal income. If the recuperated quantity consists of an amount that would otherwise have actually been income in a subsequent income year pursuant to the replacement concept, the entire lump sum will be assessable income in the income year in which it is received.

Guidance tip Where possible, clients being made redundant who are nearing their Age Pension age might want to work out an earlier dismissal date with their employer to access the concessional tax treatment for genuine redundancy payments. 

They ought to also think about the effects of negotiating an earlier termination, such as foregone salary and superannuation assurance contributions.

To learn more and if you have any questions about this or need any other business tax advice, see it here and check all the details.