Employment Termination Payment
Maybe you’ve lost your job or been made redundant, recently. Find out what you need to know about employment termination payments, how it may affect your tax return, and how to set yourself up to be more financially secure.
December 2020 – 5 minute read
Key takeaways from this article:
- Employment termination or redundancy
- Getting taxed on an ETP
- Final pay
- What could I do with my final pay
- How long does an employer have to pay out
Losing your job is a difficult thing to go through. It normally signals a change in your life whether it be financial or emotional. You may feel sad, angry or frustrated, especially if you had been in a role for a while. It can be hard to know what to do next and it is essential to seek support if you are feeling down.
Employment termination or redundancy
An Employment Termination Payment (ETP) or redundancy payment is a lump sum payment of money to an employee who has been terminated from their job or whose role has been made redundant. Being made redundant is due to your current role not being needed by your company anymore. The amount of the payment differs depending on the time spent at your role, the tax rate payable and if anything additional to wages is owed to you.
According to the Australian Taxation Office, an ETP could include:
- Payment for any unused rostered days off or unused sick leave
- Payment for compensation of a short notice period
- A ‘golden handshake’ or gratuity payment
- An invalidity payment for sustaining a permanent disability
- Compensation for wrongful dismissal
- A redundancy payment
- An early retirement scheme payment
- A payment made after the death of the employee
- A payment of market value of any property that is transferred over as a result of the termination
An ETP does not include:
- Superannuation payments or benefits
- Payments for unused annual leave or long service leave
- The tax-free portion of a redundancy or early retirement scheme payment
- Foreign employment termination payments
Getting Taxed on an ETP
Eligible termination payments are normally taxed at a lower rate than your normal income, as long as the ETP was made within 12 months of your job’s termination. The employer will provide income statements showing how much you were paid for your ETP and any withheld tax. How much you are taxed depends on the type of payment you receive at the termination of your employment.
If you receive a genuine redundancy or take part in an early retirement scheme, payments are tax free up to a limit based on the employee's years of service. If you are stood down or lose your job as a result of COVID-19, there could be different tax components on your ETP. Reach out to your employer for more details.
A termination payment can be made up of:
- a tax-free component
- a component taxed at your marginal tax rate
- a component concessionally taxed.
The lump sum payment will be taxed within the financial year in which you received it and you may be eligible for a tax return at the end of that financial year. You can’t transfer your ETP payment to your superannuation fund.
Your final pay is what your employer owes you at the end of your employment. When exiting a job, it is important to double check your entitlements. Log into your company’s leave management system and check if you have any outstanding annual or long service leave. If so, this leave should be paid out in your final pay.
In your final pay you should receive:
- Outstanding wages for hours you have worked including penalty rates or allowances
- Payment of any outstanding annual leave or long service leave
- Payment in lieu of notice (if applicable)
- Redundancy pay (if applicable)
Note that sick or carer’s leave is not paid out when your employment ends.
What could I do with my final pay?
In the confusion and uncertainty of job loss or redundancy it can be difficult to think about the future and what to do next and that is okay. The main thing is to look after yourself. One part of caring for yourself is making sure you’re as financially secure as possible, especially if you’re now living on less income.
Adjusting your saving and spending so you have enough to look after your health and wellbeing and for bills is a first step. You might also approach Centrelink for information and to see if you’re eligible for any financial help.
You might also want to identify where you could cut your spending and reduce the financial impact of any changes to your income by using this . The checklist has all sorts of immediate and longer-term ideas around what changes you can make to your spending habits to save more money and increase your financial security.
If you have a little nest egg you can use to live on while you look around for work or if you’ve taken a voluntary redundancy, you might be thinking about what to do with your final pay. We can talk to you about what you can do to make the most of your payout.
How Long Does an Employer Have to Pay Out Final Pay?
In most cases, this needs to be paid to you within 7 days of your employment termination. However, this timing can be different depending on what your employment contract says.
For further resources related to Job Loss, check out the Job Loss section of the Westpac site which covers a range of helpful topics to help get you through difficult moments in your career.
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Things you should know:
This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness for the information to your own circumstances and, if necessary, seek appropriate professional advice.
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