Employment termination payments (ETP) are liable for payroll tax. The liable amount of an ETP is the amount you paid minus the income tax exempt component. Liable termination payments include:
- payments relating to unused annual leave, sick leave, long service leave or a bonus or leave loading
- act of grace redundancy payments (golden handshakes) paid to employees after termination
- act of grace redundancy payments paid to directors and contractors
- payments instead of superannuation
- payments for notice period worked
- payment instead of notice
- income taxable component of approved redundancy or early retirement scheme payments.
Exempt payments include:
- genuine superannuation lump sum paid on retirement
- compensation for loss of job or wrongful dismissal
- income tax-exempt component of redundancy or early payments shown as lump sum D in the PAYG payment summary
- capital payment for restraint of trade, for example, a restriction on who the terminated employee can work for.
For more information, read Revenue Ruling PTA 004 and our common errors page.
An example of liable and exempt termination payments
A director is made redundant. They receive:
- a $75,000 golden handshake
- $25,000 annual leave and other leave entitlements
- $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 totaling $100,000 will need to be included as termination payments in the payroll tax return.