Employees can be paid several types of 'lump sums' that are taxed and reported differently to normal income. A lump sum is a one-time payment, usually provided to the employee, instead of 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:
- Which payments to include in the employee's ETP
- ETPs can include payments such as gratuities and severance pay. They do not include payments for accrued annual leave or the tax-free part of genuine redundancy payments.
- Payments for accrued annual and long service leave
- These payments are not part of the employee's ETP. However, the payments may receive concessional tax treatment.
- 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.
- 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.
- 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 cap applies depends on the type of payment.
- The amount to withhold and how to complete the Income statement if you are reporting through Single Touch Payroll (STP) or payment summary
- 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 rate.