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• Redundancy payments and processing Eligible termination payment in Xero

When an employee's job is made redundant their employer has to give them redundancy pay, also known as severance pay. Redundancy pay doesn't need to be paid in some circumstances, for example by some small businesses and to casual employees. For detailed information regarding Redundancy please used links below to visit the Fair Work website. Here is a basic guide.

A genuine redundancy is when:

1. the person’s job doesn't need to be done by anyone
2. the employer followed any consultation requirements in the award, enterprise agreement or other registered agreement.

For more detailed definition of what constitutes a redundancy please visit the Fair Work website.

Some employees don’t get redundancy payments when their job is made redundant. For example employees whose period of continuous employment is less than 12 months, casual employees or employees of small businesses. For more information regarding employees not entitled to redundancy please check the Fair Work website.

An ETP (Eligible termination payment) is a lump sum payment you make to an employee when they stop working for you.

ETPs can comprise of two different components:

1. Tax free component
2. Taxable component.

NOTE: You only withhold from the taxable component.

Redundancy Payments

When an employee's job is made redundant their employer has to give them redundancy pay, also known as severance pay. Redundancy pay doesn't need to be paid in some circumstances, for example by some small businesses and to casual employees.

The amount of redundancy pay the employee gets is based on their continuous service with their employer. Continuous service is the length of time they are employed by the business and doesn't include unpaid leave.

If you're covered by a registered agreement, check the terms of your agreement for information about how much redundancy needs to be paid out and other entitlements.

Employment Termination Payment (ETP)

An ETP is a lump sum payment you make to an employee when they stop working for you. For detailed information about this type of payment, visit the ATO website. Here's a basic guide:

An ETP may include:

• payment in lieu of notice
• a gratuity or 'golden handshake'
• compensation for the loss of a job
• compensation for wrongful dismissal, provided it is paid within 12 months of the actual termination of employment
• payments arising from your employee's termination because of ill health (invalidity), other than compensation for personal injury
• payments you made for genuine redundancy or under an early retirement scheme that exceed the tax-free part
• unused rostered days off
• unused sick leave
• certain payments after the death of an employee.

An ETP does not include:

• payments for unused annual leave or leave loading
• payments for unused long service leave
• salary, wages, allowances, bonuses and incentives you owe the employee for work done or leave already taken
• compensation for personal injury
• payment for restraint of trade
• foreign termination payments
• employee share scheme payments
• an advance or loan
• payments you made for genuine redundancy or under an early retirement scheme that are within the tax-free limit.

Community Development Employment Project (CDEP) payments

A CDEP payment refers to salary or wages received by persons of Aboriginal or Torres Strait Island descent on a "work for the dole" project within their community.

A CDEP payment is one of the following:

• CDEP scheme wages. These are payments you make:
  • to participants as a wage for the work they do
  • for hours worked in excess of the CDEP 'limit'
  • to trainees under the traineeship program.
• CDEP scheme participant supplement from a Centrelink payment. This supplement is an extra payment to make sure that someone getting a CDEP wage component is getting at least the same level of income as an unemployed person.
  

If you are an employer

Depending on the type of ETP, the concessional tax treatment is limited to the smaller of either the ETP cap or the whole-of-income cap. Amounts paid in excess of these caps are taxed at the highest marginal rate.

An accounting system will not be able to automatically calculate tax withheld on ETP’s. You must do this manually from the ATO tax tables.

To work out the amount to withhold from an ETP, refer to Tax table for employment termination payments (NAT 70980).

Payments for accrued leave on termination are taxed separately – for more information, refer to Tax table for unused leave payments on termination of employment (NAT 3351).

PAYG payment summary – employment termination payment

The PAYG payment summary – employment termination payment has ETP codes which are used to describe the type of payment, to ensure the correct rate of tax is applied.

You must use the PAYG payment summary – employment termination payment(NAT 70868) for an ETP made on or after 1 July 2012.

Genuine redundancy payments and early retirement scheme tax table

Tax treatment of ETPs

ETPs can comprise of two different components:

• Tax free component
• Taxable component.

You only withhold from the taxable component.

This table shows the limits set for genuine redundancy and early retirement scheme payments. The formula for the 2014/15 tax-free genuine redundancy amount is $9,514 + $4,758 for each completed year of service. Amounts in excess of the tax-free component are treated as employment termination payments.

Table 1: Genuine redundancy payments and early retirement scheme tax table

Income year	Base limit	For each complete year of service
2014–15	$9,514	$4,758
2013–14	$9,246	$4,624
2012–13	$8,806	$4,404
2011–12	$8,435	$4,218
2010–11	$8,126	$4,064
2009–10	$7,732	$3,867
2008–09	$7,350	$3,676
2007–08	$7,020	$3,511

In accordance with section 960-275 of the Income Tax Assessment Act 1997, the base limit and service amount is indexed in line with average weekly ordinary time earnings (AWOTE) each income year. The new indexed amount is generally available each May.

Information you’ll need to fill in the ETP tax calculator

• Name of employee (optional)
• DOB
• Continuous periods of employment
• Death of invalidity
• Total taxable payments you have made to the employee up to the date of termination for the 2015 financial year:
  • Early retirement scheme over tax free limits
    • Non-genuine redundancy
    • Severance*
    • Golden handshake*
    • Gratuity*
    • Payment in lieu of notice*
    • Payment for unused sick leave*
    • Payment for unused rostered days off*

Useful Links

• Definition of ETP types and codes
• ATO Employment-termination-payment-calculator
• Tax limits for Genuine/BonaFide Redundancy

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