Payments from worker entitlement funds - information for individuals


Worker entitlement funds are funds established to preserve the benefits and entitlements of employees engaged in particular industries. If you are a member of a worker entitlement fund, you need to be aware of how payments from the fund are treated for tax purposes.

What are worker entitlement funds?

Worker entitlement funds are established in recognition of the transitory nature of employment in certain industries, such as building and construction.

The funds are established to provide benefits to employees who would normally be entitled to benefits on termination of employment under the terms and conditions of their employment. The use of the funds is recognised in many awards and enterprise agreements. Employers contribute to the funds to assist in satisfying their obligations when employees leave their employment. Typically, employers contribute to the funds at some point in each pay cycle. When you terminate your employment with your employer, the fund makes a payment to you and the amount is offset against the amount your employer is required to pay you under your employment agreement or industrial award.

Approved worker entitlement funds meet certain criteria under fringe benefits tax (FBT) legislation and receive concessional FBT treatment.

What are employment termination payments?

Employment termination payments are payments you receive on termination of employment.

In most circumstances, you must receive a payment within 12 months of termination for it to be treated as an employment termination payment. The tax laws specifically outline how such payments are taxed. Employment termination payments exclude certain amounts you may also receive on termination of employment, such as superannuation benefits, pensions, and payments for unused annual and long service leave, among others. Termination payments generally receive concessional tax treatment because your employment has been terminated.

What are genuine redundancy payments?

Genuine redundancy payments are payments paid to an employee who has been dismissed from employment because the employee's position has been made genuinely redundant. Genuine redundancy payments are also specifically dealt with by the tax laws. The laws define the criteria which must be met for a payment to be treated as a genuine redundancy payment.

Genuine redundancy payments are not employment termination payments - they are taxed differently and receive a more concessional tax treatment than employment termination payments. Depending on individual circumstances, most, if not all, of a genuine redundancy payment is tax free.

The additional concessional tax treatment afforded to genuine redundancy payments recognises the termination of employment is outside the control of employees. In these circumstances, employees are dismissed as opposed to terminating their employment voluntarily. Generally, a greater amount is paid for redundancy than termination or voluntary termination in recognition of the peculiar hardship associated with being made redundant.

The concessional tax treatment only applies to amounts over and above what employees would reasonably expect to receive if they simply terminated their employment voluntarily. Also excluded from genuine redundancy payments are payments for unused annual or long service leave, and payments which are, in themselves, employment termination payments.

Payments from worker entitlement funds

Awards and industrial agreements requiring employers to make periodic payments into worker entitlement funds establish entitlements for employees.

By entering into employment arrangements, the employers are obligated to make contributions and, subject to the conditions of the fund being met, employees are entitled to the benefits. In general, the entitlements exist independent of whether termination is due to voluntary termination, dismissal or dismissal because of genuine redundancy. For tax purposes, certain criteria must be met before a payment made upon termination of employment is considered a genuine redundancy payment. If the amount is a genuine redundancy payment, only the amount in excess of what could reasonably be expected to be received by an employee in consequence of a voluntary termination of employment is considered for the genuine redundancy concessional treatment.

Because entitlements are not necessarily contingent on dismissal due to genuine redundancy and are unlikely to include amounts over and above what could be reasonably expected to be received due to voluntary termination, it is unlikely payments from worker entitlement funds meet the criteria for genuine redundancy payments under the tax laws. Where the criteria are not met, the concessional treatment given to genuine redundancy payments cannot be applied.

As termination of employment is generally a condition of entitlement, payments from worker entitlement funds usually receive concessional treatment as employment termination payments, so long as the criteria for those payments are met.

You need to ensure your income tax return is completed correctly so that payments from worker entitlement funds receive the appropriate tax treatment.

More information

    Last modified: 02 May 2014QC 27307