Tax regulations should be taken into account by employers when making severance payments.
When an employee’s employment is terminated, they may be eligible to receive a payment known as an employment termination payment (ETP). As ETPs are typically given in place of notice, the employee is usually exempt from serving their notice period. Redundancy payments, or ETPs, are given to employees whose positions are eliminated as a result of a company’s restructuring or downsizing.
Some examples of ETPs are as follows:
- Vacant time off from work, such as annual and long service leave
- Indemnification in place of Notice
- Pay for being laid off
- Paid but uncollected salary or wages
- Pay in the form of bonuses or commission
- Other entitlements termination payments, such as for superannuation or accrued leave
Depending on the specifics of the transaction, taxes may be withheld from ETPs. In general, tax breaks may be available for payments that qualify as genuine redundancy or early retirement scheme payment. If you need specific guidance on the tax treatment of ETPs, you should talk to a tax expert or the Australian Taxation Office.
How Is Termination Pay Taxed In Australia?
In Australia, termination payments are taxed differently depending on the type of payment and its purpose. Generally speaking, there are three types of termination payments: a genuine redundancy or early retirement scheme payment; a golden handshake payment; and a contractual payout.
Genuine redundancy or early retirement scheme payments are not taxable if they meet the criteria set out in Division 30A of the Income Tax Assessment Act 1997. This includes being severance pay for loss of employment due to restructuring and not exceeding certain thresholds.
Golden Handshake Payment
Golden handshake payments are usually given when an employee is leaving voluntarily or as part of a mutual agreement with their employer. These payments may be subject to taxation, as long as it does not exceed certain thresholds set by the Australian Taxation Office.
Contractual payouts are those payments made under an employment contract, such as accrued annual leave or long service leave entitlements. These are typically taxable, although the employer may be eligible for a tax offset for certain types of payments.
It is important to note that any termination payment is subject to withholdings from the Australian Taxation Office, including income tax and Medicare levy. Employers should ensure they keep accurate records of all termination payments and seek professional advice when necessary. This will help ensure that employees receive the correct entitlements and avoid any potential penalties from the ATO.
How To Enter An Employment Termination Payment On Your Tax Return
The “employment termination payment” section of the tax return form must be filled out to report an ETP. What follows is a high-level description of the steps involved:
Collect all paperwork related to your ETP, such as pay stubs, notices from your employer, and other paperwork.
Sort out what parts of your ETP are deductible and what isn’t. Compensation such as salary, wages, bonuses, and commissions are all part of an ETP’s taxable component. The early retirement scheme payment or a genuine redundancy payment are two examples of atypes of payments that do not have to be taxed.
To determine your tax liability, break down your ETP into its taxable and nontaxable parts. Amounts of tax due can be calculated using tax rates and thresholds in effect during the year the payment was received.
Include details about your ETP, both taxable and nontaxable, on your tax return. You will be required to detail the payment, including the total amount, the taxable and non-taxable portions, and the tax that was withheld.
Don’t forget to file for any tax benefits you’re eligible for as a result of your ETP. For instance, if you were given a true redundancy payment, you might be able to write off the amount that wasn’t subject to taxes.
To avoid over or underpayment of tax, it is crucial that your ETP be reported correctly on your tax return. Get in touch with a tax expert or the Australian Taxation Office if you need clarification on how to report your ETP.
For more information on termination pay and taxation in Australia, visit the ATO website or speak to an accredited tax professional. Knowing your rights as an employee is key to understanding how you will be taxed upon leaving a job. Or you may hop on to termination payment tax.
By being aware of their entitlements and following the necessary procedures, employees can ensure that they receive any payments due to them without incurring unnecessary tax liabilities. This will help make the transition from one job to another smoother for both employers and employees alike.