Paying and recording employment termination payments

Termination payments are made by employers to employees after employment has been terminated. So what is ETP and how does it differ from regular income?

There are many types of employment termination payments (ETP), ranging from gratuities to redundancy payments. Unlike an employee’s salary, ETPs are usually paid in a lump sum as part of final pay after resignation.

Employers need to be mindful when calculating final pay and keep records specifically for ETPs. Any eligible termination payment needs to be recorded and provided to the Australian Taxation Office (ATO). An ETP payment summary should also be provided to the employee.

When should termination pay be paid?

Generally speaking, employment termination payments need to be received by the employee within 12 months of the termination. However, the 12-month rule does not apply if the termination pay is a genuine redundancy payment. 

What is an ETP payment summary?

Many employees may wonder, “How is termination pay calculated?” They should find this answer in their ETP payment summary. 

For each ETP, employers need to provide the employee with two copies of an ETP payment summary within 14 days of payment.

You can either obtain an ETP payment summary from the ATO website or print your own, provided you’re approved by the ATO. An ETP payment summary should clearly show:

• the taxable component of an employee’s ETP
• the amount of tax withheld
• the code for each type of ETP.

If you make more than one ETP, you are required to complete a separate payment summary for each payment.

Reporting termination pay and ETP tax

The ETP payment summary provided by the ATO is self-duplicating. It contains a copy for the ATO, the employer, and the employee. Employers are required to send the original ETP payment summary to the ATO along with the employee’s PAYG payment summary statement. This forms part of an employer’s PAYG annual payment summary report, which is submitted at the end of the income year.

The ETP payment summary can be lodged online or submitted via post to the address on the PAYG payment summary statement. It’s important to note that the ATO will not accept any payment summaries generated by payroll software, such as MYOB or Xero.

Employers are also required to retain the payer copy for at least five years. These can be stored electronically.

Other points to note regarding employment termination payments

Can employees salary sacrifice termination payments?

In most cases, ETPs must be taken in cash. As they are not officially classified as salary and wages by the ATO, they cannot be contributed to a superannuation fund. They can also not be salary sacrificed.

The only exception to this rule is if employers paid “transitional termination employment” to an employee before 1 July 2012. These payments were made as a result of an entitlement that existed before 10 May 2006. In this case, employees could work out a transitional arrangement where the ETP can be directed into their super fund.

Is super paid on termination pay?

This is determined by the Fair Work Act 2009 and the federal superannuation law. Payments that are not part of ordinary time earnings (OTE), such as redundancy pay, are not subject to the superannuation guarantee. 

However, if an employer chooses to provide an employee with payment in lieu of notice, this ETP should include super contributions. Any payment in lieu of notice is subject to the 9.5% superannuation guarantee.

Does an employer need to provide an employment separation certificate?

An employment separation certificate is provided to a former employee if they wish to claim a Centrelink payment. This form includes basic information about their employment, the reason for termination and any employment termination payments they received. 

Employers do not need to give employees an employment separation certificate as part of an ETP payment summary. However, if an employee requests it, you must provide this to them. The form can be downloaded from the Department of Human Services website.

If you’re paying termination pay, it’s best to seek legal advice before moving forward. This is to ensure you meet all the timelines and are compliant with legislation. This is where Australian Business Lawyers & Advisors (ABLA) come in. 

It can be challenging for employers to distinguish between different types of ETPs and understand the obligations around termination pay.