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  • Taxation of termination payments

    Employees can be paid several types of 'lump sums' that are taxed and reported differently to normal income. A lump sum payment is a one-time payment, usually provided instead of making recurring payments over a period of time.

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

    The steps below help you work out:

    1. which payments to include in the employee's ETP      
      • ETPs include things like gratuities and severance pay, but not payments for accrued annual leave or the tax-free part of genuine redundancy payments.
       
    2. payments for accrued annual and long service leave      
      • These payments are not part of the employee's ETP but may receive concessional tax treatment.
       
    3. the tax-free amount if the termination is because of a genuine redundancy or early retirement scheme      
      • Payments for these types of termination are tax free up to a certain limit. The tax-free amount is not part of the employee's ETP.
       
    4. if any of the ETP is tax-free      
      • An ETP has a tax-free component if part of the payment is for invalidity or work done before 1 July 1983. You don't withhold tax from this component.
       
    5. how much of the ETP is taxed at a concessional rate      
      • ETPs are concessionally taxed up to a certain limit, or 'cap'. There are two caps – which one applies depends on the type of payment.
       
    6. the amount to withhold and how to complete the payment summary or Income statement if you are reporting through single touch payroll (STP)     
      • You withhold tax from the taxable component of the ETP at concessional rates up to the applicable cap and at the highest marginal rate for amounts above the cap.
       

    A payment must generally be made within 12 months of termination to qualify as an ETP and receive concessional tax treatment. Otherwise the payment is part of the recipient's assessable income and is taxed at their marginal rates.

    Informing your employees

    Termination payments for employees explains:

    • how termination payments are taxed
    • how the caps work, including the tax implications for employees who are subject to the whole-of-income cap
    • what employees need to do with their Payment summaries or Income statements and how to report these payments on their tax return.

    You can provide this information to employees with your letter of offer or Pay as you go (PAYG) payment summaries.

      Last modified: 04 Jun 2019QC 26218