Employees can be terminated for a variety of reasons. If you are exiting your place of work, you may be entitled to receive employment termination payments. Different rules and regulations surround the tax implications involving the different types of employment termination payments. Every employer is required to include a statement of termination, with compensation amounts varying depending on the case.
What are Employment Termination Payments?
Employment termination payments (ETP), also known as severance pay, are payments made to employees when their employment is terminated.
In Australia, there are certain rules and regulations that govern these types of payments, and it’s important for both employers and employees to be aware of them, including the rules and regulations around online tax filing and payments.
Types of Employment Termination Payments
When an employee’s job ends in Australia, they may be given certain payments called Employment Termination Payments (ETPs). Some examples of these payments include:
- Payment for unused annual leave: This is money given for vacation days that the employee was allowed to take but didn’t use. This kind of payment is considered taxable and must be reported on the employee’s online tax return.
- Payment for unused long service leave: This is money given for long-term leave that the employee was allowed to take but didn’t use. This is also considered taxable and must be reported on the employee’s online tax return.
- Payment for unused personal/carer’s leave: This is money given for personal or caretaker leave that the employee was allowed to take but didn’t use. This is also considered taxable and must be reported on the employee’s online tax return.
- Payment in lieu of notice: This is money given instead of the notice period that the employer is required to give before ending the employee’s job. This kind of payment is not considered taxable, but the employee may want to consult a One Click Life online tax agent to ensure it is reported correctly on their tax return.
- Redundancy pay: This is money given to an employee who is losing their job because of downsizing. The amount of money given depends on how long the employee has worked there and other factors. This is not considered taxable if it doesn’t exceed a certain limit, the employee may want to use a redundancy calculator or consult with a tax professional to ensure it is correctly reported.
- Payment for loss of office: This is money given to an employee who holds a special job or position, like a director, and loses it because of their job ending. This kind of payment is not considered taxable, the employee may want to consult a One Click Life online tax agent to ensure it is reported correctly.
Who is not eligible for ETP?
Employees who are not eligible for Employment Termination Payments (ETPs) include:
- Employees who have not been with the company for a certain period, typically at least 12 months, are not eligible for severance pay.
- Employees who have been terminated for serious misconduct, such as theft or fraud, are not entitled to receive these payments.
- Independent contractors, casual workers, and employees on a fixed-term contract are not eligible for ETPs.
- Employees who have voluntarily resigned, retired, or resigned due to ill health are not eligible for ETPs.
- Employees who have been dismissed for poor performance or redundancy may be eligible for ETPs, but the amount of payment will vary based on the circumstances. Employees who are not eligible for ETPs need not worry about online tax filing or online tax payment, as they are not entitled to receive these payments.
How much will you receive for ETP?
The amount of a termination payment will vary depending on the specific circumstances of the termination, but it must be at least equal to the amount of the employee’s unused annual leave, long service leave, and personal/carer’s leave.
For employees who are covered by an award or enterprise agreement, the award or agreement may also provide for other entitlements, such as redundancy pay.
It’s important for both employers and employees to be aware of this and any other specific eligibility criteria as per their company’s policy, industry, or award. It is always recommended to seek legal advice if you are unsure of your rights or obligations regarding employment termination payments.
Taxation on ETP
As an employee, you will need to provide your employer with your Tax File Number (TFN) for them to correctly calculate the tax to be withheld. If you do not provide your TFN, your employer will be required to withhold tax at the highest marginal rate which can result in a higher tax liability for you.
Employers statement of termination
Employers also have an obligation to provide employees with a statement of their termination payment, which must be given to the employee within 14 days of the termination.
The statement must include the amount of the payment, the gross amount, the net amount, and the tax withheld. This statement will also be used by the ATO to match the termination payment received to your TFN and make sure that the correct tax has been withheld.
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