Getting ETP’s right
When an employee is let go or they quit; there is a chance they are owed money, otherwise known as employment termination payments.
If an employee leaves the business, they may be entitled to several lump sum payments, many of which are taxed differently to normal income. Understanding what is owed and making these payments promptly will help ensure the ex-employee moves on quickly and harmoniously.
Employment termination payments include lump sum payments that cover the following:
- Payment owing for any of the employee’s unused rostered days off.
- An employee’s invalidity payment, often relating to payments for permanent disability, other than compensation for personal injury.
- Specific payments after the death of an employee.
- Gratuity payments (or ‘golden handshake’ payments).
- Payments in lieu of notice.
Other payments leaving employees may be eligible to receive include payments for unused annual or long service leave, or the tax-free portion of a genuine redundancy or early retirement scheme. These payments are strictly not included in ETP; but they can be taxed concessionally.
Generally, regulation surrounding the taxation of employment termination payments include:
Employees pay a lower tax rate on payments when received within twelve months of their termination. If payments are not received within 12 months, they will be included in the employee’s assessable income and taxed at marginal rates. If an employer has failed to make relevant payments within 12 months of termination, the employee can take legal action.
Employment termination payments can not be rolled over into super.
It is important to be aware of the special tax treatment and differing caps on concessional treatment of ETPs. Consider:
Whole-of-income cap: tax payable on ETP, if employee earns more income in the same financial year (eg, getting a new job) as their employment is terminated.
ETP cap: cap applies to all ETP and has a threshold that is indexed annually. ETP tax rate varies depending on age of employee. If over the preservation age, they are taxed at a maximum of 15 per cent plus 2 per cent Medicare Levy. If under the preservation age, they are taxed at maximum of 30 per cent, plus 2 per cent Medicare Levy.