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However, some components of ETPs are not liable for payroll tax.
Payroll tax is payable on the ETP amount that would be assessable income of the employee under the Income Tax Assessment Act 1997 (ITAA).
ETPs are taxed and returned for payroll tax in the year in which they are paid.
Contact the Australian Taxation Office (ATO) for advice about an ETP’s specific income tax treatment or visit the termination payments section on the ATO's website.
Liable payments
Payments relating to an employee’s retirement or termination, such as:
unused annual leave
unused sick leave
long service leave
a bonus, or
leave loading.
Payments in lieu of notice.
A gratuity or “golden handshake”.
The taxable component of an employee’s invalidity payment under the ITAA (for permanent disability, other than compensation for personal injury).
Certain payments made after the death of an employee.
The market value of the transfer of property (less any consideration given for the transfer of this property).
Act of grace redundancy payments paid to directors and contractors.
The following ETPs may be liable for payroll tax, depending on the nature of the payment:
Compensation for loss of job or wrongful dismissal.
as a result of the termination of an employee's employment or after the employee's death, and
generally no later than 12 months after termination.
However, section 82-135 of the ITAA excludes a range of payments from the calculation of the tax-free component, including amongst other things:
Superannuation benefits (for example, a lump sum or income stream from a super fund).
Foreign termination payments.
Capital payment for restraint of trade (for example, a restriction on who the terminated employee can work for).
Payments not liable for payroll tax
The tax-free part of a genuine redundancy payment or an early retirement scheme payment shown as lump sum D in a pay as you go (PAYG) ETP payment summary.
Early retirement scheme payments that do not exceed the tax-free limit.
Death benefit ETPs
A death benefit ETP is a lump sum payment which is paid to a person or a trustee of a deceased estate by the deceased person’s employer after the death of that person.
Like an ETP, a death benefit ETP may have a tax-free and a taxable component under the ITAA. Read the ATO’s death benefit ETP page for more details.
A payment of a death benefit ETP is treated the same as if the payment was made to the deceased employee, even if the payment is made to a trustee or another person, such as a family member, after the employee’s death. See section 27 of the PTA.
Example of liable and exempt termination payments
A director is made redundant. They receive:
a $75,000 golden handshake
$25,000 in unused annual leave and other leave entitlements, and
$10,000 in income tax exempt redundancy payments – shown as lump sum D on the PAYG payment summary.
The $75,000 golden handshake and $25,000 in leave entitlements, totalling $100,000, must be included as termination payments in the payroll tax return.
Whether your business uses Single Touch Payroll (STP) or issues a PAYG ETP payment summary, the payroll report and the final payment summary issued to the employee may include the descriptions detailed in the table below.
Table 1: The payroll tax liability status of lump sum codes
Codes
Description
Payroll tax liability status
Lump sum A or B
These lump sums are for unused annual leave and long service leave. They may be shown on an employee’s payment summary or on a letter or statement from the employer.
Yes
Lump sum D
If a termination was because of a genuine redundancy or an early retirement scheme, the payments will include a tax-free component.
The tax-free component is shown as a lump sum D.
No
Lump sum E
These payments relate to earlier income years and return-to-work payments.
Yes
How to declare ETPs in your returns
The amount of an ETP that is taxable for payroll tax is the total ETP amount you paid minus any Lump sum D components (tax-free components of genuine redundancy or early retirement scheme payments).
Add the total taxable amount of the ETPs paid to employees to the “Termination payments” field in your payroll tax returns.
It is important that you correctly declare ETPs in your returns. Errors in your returns may result in the underpayment of payroll tax, which is also known as a tax default.
Interest will be imposed on any underpayments. Your business may also be liable for penalty tax. Read the interest and penalty tax page for more details.
Record-keeping for ETPs
Always maintain relevant records and working papers showing how your ETP figures were calculated. Records and working papers must be:
retained for at least 5 years
sufficient for a payroll tax liability to be properly assessed
in English, or a form easily translated to English, and
readily available to us if requested, for example as part of a payroll tax audit.
Open the headings below for other requirements when using STP or PAYG forms.
Any other records ordinarily retained, for example:
financial statements
FBT returns and working papers, and
invoices.
Voluntary disclosure
Contact us to make a voluntary disclosure if you have not declared all liable amounts in your monthly and/or annual returns, including previous financial years.
Voluntary disclosures attract a reduced level of penalty tax compared to cases where we identify an underpayment. Interest will still be imposed.
Non-compliance identified through our data matching activities will result in penalty tax and interest charges, in addition to any underpayments detected.
