Tax and termination payments – Getting it right: September Summary
This month Mariano Rossetto, Forensic Accountant at Vincent’s Chartered Accountants, spoke about income tax consequences on payments at the conclusion of employment.
Mariano discussed the complexities of correctly characterising termination payments. In particular he spoke about:
- Genuine redundancy payments;
- “redundancy” payments that don’t meet the genuine redundancy rules
- Compensation payments (principally for personal injury, unfair dismissal, harassment or discrimination); and
- Golden handshakes.
This question becomes salient when negotiating an employee’s exit. While there is little difference to the employer how the termination payment is taxed, this is a prominent question in the employee’s mind. Some payments (such as Employment Termination Payments (ETPs)) are taxed more favourably than others.
It is complicated to work out which payments can be considered Employment Termination Payments (ETP), but Mariano gave us some basic guidance:
- the payment usually follows as an effect or as a result of the termination of employment;
- but for the termination of employment, the payment would not have been made to the employee;
- the termination of employment usually comes before the payment.
The table below helps identify what is an ETP or what may have a different taxation rate:
|Payments that are ETPs include:||Payments that are not ETPs include:|
|A gratuity or ‘golden handshake’||Accrued leave payments such as:
|Severance pay||Payments below the genuine redundancy or early retirement scheme tax-free limit|
|Non-genuine redundancy payments||Salary, wages, allowances, bonuses and incentives owing to the employee for work done or leave already taken|
|Payments in lieu of notice of termination||Super benefits (for example, a lump sum or income stream from a super fund)|
|Unused rostered days off (RDOs)||Foreign termination payments|
|Unused sick leave||Certain payments for restraint of trade|
|Compensation for loss of job||Certain payments for personal injury if you are compensated for your inability to be employed|
|Compensation for wrongful dismissal, provided it is paid within 12 months of the actual termination of employment||Employee share scheme payments|
|Payments for loss of future super payments||An advance or loan|
|Payments arising from an employee’s termination because of ill-health (invalidity), other than compensation for personal injury.|
|Payments in respect of genuine redundancy or paid under an early retirement scheme that exceed the tax-free limit|
|Lump sum payments paid on the death of an employee|
If you have any further questions please contact Mariano Rossetto