Were you made redundant from your job? Did you get an Employment Termination Payment or “ETP” redundancy payment?
Well, you’re in good company! Redundancy can be a stressful event and a big change – but the fact is, a huge number of Australians experience a redundancy. And many people will be made redundant several times during their career.
Australian Government statistics show that 2 per cent of working Australians are made redundant and receive an eligible termination payment – annually! That means if you have 50 friends, during each year, one of them will probably experience a job redundancy.
“What is a Redundancy Payment or Employment Termination Payment?”
An employment termination payment (also called an ETP or redundancy payment) is usually a lump sum payment paid by an employer to staff whose jobs are made redundant.
When you are made redundant you might receive money that’s broken down into several different items, including any of the seven numbered items below.
Later, when you do your tax return, the ATO will only treat some of these items as redundancy payments. Here’s why that is important: Some redundancy payments are taxed differently (or not taxed at all) – which can leave more money in your pocket.
For tax purposes, redundancy payments may include,
- Severance pay (usually a number of weeks’ pay based on the duration you were in your job)
- A “golden handshake” or one-off goodbye payment
- Payment in lieu of notice (eg. instead of giving you two weeks’ notice that your job ended, the employer might pay you for that time but not require you to work)
…but the ATO says these items below are not technically part of a redundancy payment:
- Back-pay or money owed to you for work you’ve done
- Payouts of leave loading or accrued annual leave
- Payments made instead of superannuation benefits
- Pay-outs for unused long service leave
A couple more details about termination payments:
- The ATO says the payment must generally be received within 12 months of stopping work, or else it is not treated as a redundancy payment. (There are some exceptions to that and a tax agent can help sort them out.)
- You can’t just drop your ETP into a superannuation account.
“Do I pay tax on my redundancy payment or ETP?”
Your lump sum payment or termination payment may be taxed at a special tax rate depending on how long you had the job. The taxation rate that applies is usually sorted out at the time of a redundancy. But later, you need to add the details of your payout to your next tax return.
Confused about your ETP and tax return?
You can just give a copy of your ETP PAYG summary to your tax agent and let them handle it.
At Etax.com.au we’ll help you get your ETP right, at no extra cost when we lodge your tax return.
The confusing aspect of an ETP in your tax return is that it needs to be determined whether an ETP is actually a “genuine redundancy for tax purposes” and this affects whether it is “untaxed” or taxed at a special rate. The ETP must be related to a situation where an employee’s position is genuinely made redundant. These points help to indicate a genuine redundancy:
- You were dismissed from employment
- The dismissal is genuinely caused by the position becoming redundant
- The ETP must be made because of the redundancy
- All ties are severed between the employer and employee (i.e. the employer cannot terminate your job and re-hire you at a while later.)
- The redundant job is not re-filled by another person to perform the exact same role
Employment termination payments come in different types
Common forms of an employment termination payment can be any of the following. Depending on which one of these payments is made will determine the tax payable
- Payment in lieu of notice
- Compensation of losing a role
- Unused sick leave
- Payment after the death of an employee
- Unused RDO’s
Exclusions of an employment termination payment include:
- Unused annual leave
- Compensation for injury
- Foreign termination
- Advances and loans
- Share schemes
Employment termination payments must typically be processed within twelve months of the role being terminated. They can be processed at lower rates of tax within twelve months then if they are submitted after, so it’s a good idea to follow this up.
Caps or Limits on Employment Termination Payments
For the 2015-16 tax year the ATO tax-free limit on ETPs is $195,000. This applies to any genuine ETP that includes;
- Redundancy over the tax-free limit
- Early retirement scheme over the tax-free limit
How to enter an Employment Termination Payment on your tax return
First of all, after you are made redundant, your employer must issue a separate PAYG summary for the ETP. The ETP PAYG summary will include details of your redundancy payment. That PAYG must be provided within 14 days after your final work day.
If you need any help with an ETP on your tax return, you can just send a copy of your ETP PAYG document to your tax agent.
Unlike many tax agents, Etax will not charge you extra fees for help with your ETP. (Watch out for agents who charge unnecessary addon fees for ETPs.)
Losing a job is often quite a traumatic experience and something on a huge number of Australians face each year. Hopefully, if you ever go through this yourself, your ETP can provide a buffer and by making the most of it you can get a boost into your future success.
Need more information about entering an ETP on your tax return? Email us at [email protected]