Termination Payments for Employers in Australia

Additionally, certain payments, such as ETP, have tax implications that differ from regular payments. Knowing what’s involved is key to complying with Australian employment laws and keeping departing employees on board.

What’s Involved in Termination Payments?

Wages in Arrears

Employees must be paid for all hours worked up to their termination date, including any penalty rates and allowances that apply. Getting this right is crucial to avoid disputes and ensure fairness.

Accrued Leave

• Annual Leave: Employees are entitled to be paid out for any unused annual leave upon termination. This payment will include leave loading if it applies to the relevant award or enterprise agreement.
• Long Service Leave: Long service leave is payable if the employee has met the required service period. The rules vary by state or territory, so check local regulations.

Payment in Lieu of Notice

If an employer doesn’t provide the required notice period, they must pay the employee for that time. The minimum notice period, as outlined in the Fair Work Act, requires employers to give employees a set period of notice before termination or offer pay in lieu of this notice. The amount is the employee’s full pay for their ordinary hours during the notice period.

Genuine Redundancy Payment

Redundancy pay applies when employees are terminated because their position is made redundant. A genuine redundancy payment is a specific type of pay that may offer unique tax benefits or exemptions, as it is not subject to the same regulations as standard termination payments.

The amount is based on the employee’s length of service and is outlined in the National Employment Standards (NES). Not all employees are entitled to redundancy pay; for example, casuals and those with less than 12 months’ service may not be eligible.

Employment Termination Payments (ETPs) and Early Retirement Scheme Payments

ETPs include severance payments, bonuses or other lump sums paid upon termination. These have tax implications and must generally be made within 12 months of termination to be concessional tax.

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Tax on Termination Payments

The tax on termination payments can be very different depending on the type of payment:

• Unused annual leave and long service leave are taxed at different rates to regular income.
• Genuine redundancy payments may be tax-concessionable if they meet the ATO’s criteria.

Individuals may pay tax at different rates based on the amount received and specific conditions surrounding the payments.

Knowing this can help employers manage their financial obligations better.

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When calculating taxable wages, employers must include termination payments, such as payments for terminating office, payments to contractors who are considered employees, and other termination payments. 

On the other hand, non-taxable termination payments include payments for redundancy, long service leave, and annual leave.

When lodging the annual return, employers must enter non-taxable termination payments in the ‘Other non-taxable payments’ field.

The public ruling on termination payments (PTA004) for your specific state provides more information on non-taxable termination payments.

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Employers must determine the payment amount and the tax-free component of an ETP based on the employee’s age and the payment amount. They must also consider the 12-month rule, which affects the tax treatment of ETPs received more than 12 months after termination.

Employers also need to account for the type of payment and the employee’s employment contract when calculating an ETP. For example, genuine redundancy payments are tax-free up to a certain threshold, while early retirement scheme payments may be taxed at a concessional rate.

Download our redundancy spreadsheet to help you calculate termination payments.

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When reporting ETPs, employers must include the following information:

• The amount of the ETP
• The tax-free component
• The taxable component
• The date of payment

Employers must also provide employees with a payment summary, which includes details of the ETP and the tax withheld. Employees use this information to complete their income tax return.

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• We recommend keeping up these steps as good practice:

  • Keep records of all employment agreements and contracts.
  • Review and update policies on termination payments regularly.
  • Communicate with employees about their entitlements and any changes to legislation that affect them.

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• Termination payments include wages in arrears, accrued leave, and redundancy pay.
• Employers must pay for worked hours, including penalties, and provide payouts for unused annual and long service leave.
• Notice periods must be given or paid in lieu as per the Fair Work Act.
• Redundancy pay may offer tax benefits for eligible employees.
• Employment Termination Payments (ETPs) should be issued within 12 months for concessional tax treatment.
•  Payments should typically be made within 7 days of termination for compliance.
•  Different payments are taxed at various rates, and payroll tax implications exist.
• Calculating ETPs involves understanding payment amounts and tax-free components.

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What happens if I don’t pay termination entitlements on time?

Paying late can lead to legal disputes and penalties. To avoid problems, you must pay on time as per the award or agreement.

Are all employees entitled to redundancy pay?

Not all employees are entitled to redundancy pay. Casuals, those with less than 12 months of service, or those employed by small business (with less than 15 employees) may not be eligible for redundancy entitlements.

How do I calculate payment in lieu of notice?

Payment in lieu of notice is the employee’s full pay for ordinary hours worked during the notice period. Thus, employees get fair compensation if they don’t have to work through their notice period.

What are the tax implications of lump sum payments received upon termination?

Lump sum payments received upon termination, such as employment termination payments or voluntary separation payments, can have significant tax implications.

It's important to understand that these payments are often taxed differently from regular income. Retirees and individuals changing jobs should know their tax obligations to avoid unexpected liabilities. Consulting with a tax professional can help ensure compliance and optimise tax outcomes.

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