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  • Withholding and payment summaries/ income statements

    You need to:

    • withhold from the taxable component of the ETP at the correct rate (the rate depends on the applicable cap and, for life benefit ETPs, whether the employee has reached their preservation age)
    • enter the appropriate codes on the employee's ETP payment summary /income statement (to confirm the correct rate of tax has been applied)
    • give the payment summary to the employee within 14 days of paying the ETP.

    To work out the employee's preservation age, the amount to withhold and the codes to enter on the employee's payment summary, see:

    You can use the ETP payment summary paper form available from the ATO, or an equivalent payment summary produced by your payroll software.

    If you are reporting through single touch payroll to report the ETP it is included on the employee's income statement.

    See also:

    Example: Single ETP with excluded and non-excluded parts, and unused leave payments

    After five years' service, Alec, who is 30 years old, is made redundant from his place of work in 2019–20 and receives the following payments in his termination pay:

    • redundancy pay – $35,000.00
    • unused sick leave – $6,247.00
    • payment in lieu of notice – $1,723.42
    • unused annual leave – $5,234.17
    • unused long service leave – $11,423.91
    • gratuity – $25,000.00.

    Under Alec's workplace agreement, payment in lieu of notice, and the gratuity, are payable on termination of employment – this means they are paid for any type of departure, including voluntary termination. Alec's employer has contacted us and confirmed that his redundancy meets the conditions of a genuine redundancy – this means the redundancy payment and unused sick leave payment are in excess of what was reasonably expected to be paid for a voluntary termination.

    The redundancy payment and unused sick leave payment are excluded payments and the ETP cap only applies. The payment in lieu of notice and gratuity are non-excluded payments, and the lesser of the ETP cap and whole-of-income cap applies.

    Alec had previously received $140,000 in other taxable payments (salary and wage income) during the income year.

    Table: Steps to work out how Alec's termination pay is taxed

    Step

    Action

    Result

    1

    Calculate the genuine redundancy payment

    The redundancy payment and unused sick leave qualify as genuine redundancy: $35,000 + $6,247

    $41,247

    2

    Calculate the tax-free limit on the genuine redundancy payment

    The tax-free amount in 2019–20 is $10,638 + $5,320 for each completed year of service. Alec has five years of completed service: $10,638 + (5 × $5,320)

    Note: The result is shown at label D on a PAYG payment summary – individual non-business  

    $37,238

    3

    Calculate the taxable component of the genuine redundancy part of the payment

    This is the genuine redundancy payment from step 1 minus the tax-free limit amount from step 2: $41,247 − $ 37,238

    Note: The result is shown at Taxable component on a PAYG payment summary — employment termination payment with ETP code R. Because this part of the termination payment is an excluded payment, only the ETP cap applies. Alec is under the preservation age and the excluded payment of $4,009 will be taxed at 32%.

    $4,009

    ETP code R

    4

    Calculate the remaining ETP cap

    This amount is the ETP cap ($210,000 for 2019–20) minus the taxable component of the excluded payment (from step 3): $210,000 − $4,009

    $205,991

    5

    Calculate the non-excluded payment

    The non-excluded part of the termination payment is the payment in lieu of notice and the gratuity: $1,723 + $25,000

    Note: The result is shown at Taxable component on a separate PAYG payment summary – employment termination payment with ETP code O.

    $26,723

    ETP code O

    6

    Calculate the whole-of-income cap

    This is the whole-of-income cap of $180,000 minus other taxable income:

    • $140,000 salary and wage income
    • $16,657 for unused annual and long service leave

    The whole-of-income cap is not reduced by the excluded part of the termination payment because it was received at the same time as the non-excluded payment – that is, it was not received earlier in the income year.

    $23,343

    (Calculated whole-of-income cap)

    7

    Determine the lesser of the ETP caps

    Alec's non-excluded payment will be subject to the lesser of the remaining ETP cap or the whole-of-income cap:

    • Remaining ETP cap (from step 4) $ 205,991
    • Calculated whole-of-income cap (from step 6) $23,343

     

    $23,343

    (Calculated whole-of-income cap is the lesser cap)

    8

    Apply the calculated whole-of-income cap to the non-excluded payment

    The non-excluded payment ($26,723, from step 5) is taxed concessionally up to the calculated whole-of-income cap of $23,343.

    The remainder of the non-excluded payment ($26,723 − $23,343 = $3,380) is above the whole-of-income cap and is taxed at the highest tax rate (47% in 2019–20).

    $23,343 taxed at 32%

    $3,380 taxed at 47%

    Alec's payments for unused annual and long service leave totalling $16,657 are not part of his ETP. They are taxed separately and reported on his PAYG payment summary – individual non-business. See Accrued leave.

    End of example

    Amending a payment summary

    If there is a mistake with any amount or ETP code in the payment summary given to the employee or the ATO, you should complete a new payment summary, entering X in the box amending a payment summary.

    If there is a change in circumstances and you have not yet issued the payment summary or lodged your PAYG withholding annual report, you can complete the payment summary according to the updated circumstances.

    For example, if an employee retires from their position on a certain date, and that former employee dies before the payment summary is issued, then the payment and payment summary should be completed as a death benefit ETP.

      Last modified: 04 Jun 2019QC 26218