It is hard times and there is no such thing as a stable job these days it seems. Many often wonder how your final pay is taxed…
The tax treatment of your final payment depends on how your employment was terminated.
If you decide to leave the job and your position is not abolished, your employer will pay your wage income owed and *accrued leave, taxed at a normal rate. If your employer pays you a gratuity or similar payment, that payment will be taxed as an employment termination payment( refer to later explanation).
*Accrued leave may receive concessional tax treatment and be taxed at rates up to 32%.
If you reach your retirement age and have decided to leave the job, your employer will pay the wage owed and accrued leave or you may receive an employment termination payment.
- Genuine redundancy – your employment is terminated because the job you were doing is abolished. If you receive a genuine redundancy payment, it will be tax-free for a certain limit amount.
- Non-genuine redundancy – if your redundancy does not meet the definition of genuine redundancy, then it will be taxed under the normal employment termination payment
The employer decides to terminate the employee so the employee has to leave involuntarily. Under this situation, the employer can still offer a redundancy package or they may put the employee in a position to resign.
Death of an Employee
In this special situation, the employee will receive a termination payment called death benefit ETPs.
So what are employment termination payment (ETP) and its tax treatment?
It is a final payment given to the terminated employee. Normally the ETP will be made within 12 months of termination so it can receive concessional tax treatment. If the payments are made outside the 12-month period, it will be included in the assessable income and taxed at marginal tax rates.
There is an ETP cap on how much your ETP can receive concessional tax treatment. For 2014-15, the cap amount is $185,000 and it’s indexed annually. The amount over this cap will be taxed at the highest marginal tax rate.
For advice on your termination pay call tax accounting Adelaide on 83374460. And don’t forget when one door closes another will open.
Tax Accounting Adelaide
Angela Xu – our first full time staff, now former staff.