Employment Termination Payments
What are Employment Termination Payments? (ETP's)
ETP's are payments made to employees upon their termination for such things such as
Unused sick leave
Payments in Lieu of notice
Compensation for loss of job
Compensation for wrongful dismissal with 12 month of employment
Redundancy in excess of the tax free threshold limit
Invalidity payments
Payments on death of an employee
ETPs never include
Unused annual leave or long service leave
Payments or bonuses for work already performed
Personal Injury compensation
Generally, an ETP payment must be within 12 months from the employee's termination date. A seperate ETP payment summary (from the regular Individual Non-Business summary) must be submitted
to the tax office for ETP payments.
How to calculate tax on ETP's
The first step is to determine the tax free component of an ETP.
Any length of service before 1st July 1983 is tax free. To calculate the tax
free component use the following formula:
ETP PAYMENT * (Number of days before 1st July 1983 / Total days service)
The next step is to calculate the tax on the assessable component of the ETP (total ETP payment less any
tax free portion). The tax you pay on the ETP will depend on
Your preservation age - This is the age in which retirees can access their superannuation. Currently the preservation age is 55 years. If you reach this age
when you are paid an ETP, you are taxed at a reduced rate.
The ETP threshold - all payments in excess of the threshold are taxed at the top marginal rate, regardless
if you have reached the preservation age.
| until 30th June 2011 |
under 160,000 | over 160,000 |
|---|
| Under 55 years |
31.5% |
46.5% |
| 55 years and over |
16.5% |
46.5% |
Redundancies
Any portion of redundancy amounts over the tax free threshold is considered to be an Eligable Termination
Payment and should be taxed as above. The redundancy threshold is indexed annually. Currently the threshold
is calculated as follows:
a base amount of $8,126 plus $4,064 for each full year of completed service.
Invalidity Payments
Invalidity payments are made to employees as a result of their inability to continue employment
due to a physical or mental incapacity. Specific critia must be met for a genuine invalidity payment.
A portion of the invalidity payment is tax free which is calculated as follows:
Tax Free portion = (X * Y ) / Z
where X is the total Invalidity Payment
and Y is the number of days after the termination date up until the retirment date had the employee kept
working and
Z is the total number of days from the start date up until the termination date.
Payments made upon the death of an employee are taxed according to whether the payment
is to be forwarded to a dependant, non-dependant or a trustee of an employee.
Dependants are regarded as either a surviving spouse or de facto spouse, a child under 18 years
or any person who is financially dependant on the deceased. There is no tax withheld from dependant payments
up until the ETP threshold ($160,000), at which it is taxed at the top marginal rate- 46.5%.
Payments to Non-Dependants are taxed at the normal rate for ETPs (31.5% under $160,000 and 46.5% over $160,000.
There is no requirement for employers to withhold tax to payments made to the trustee of a deceased's estate.
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