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In this Australian Tax guide we examine the types of payments you must consider and are legally required to make during the redundancy and termination process.
When an employee leaves, you may make payments to them that are:
An employment termination payment (ETP) is a lump sum you pay to an employee as a consequence of their termination when they stop working for you. These payments are taxed at different rates, depending on the employee's age and whether the payment is below the ETP cap for the relevant income year. Generally, you must pay the ETP within 12 months of the date the employee stops working for the amount to be treated as an ETP.
You make a genuine redundancy payment when you make the payment following the dismissal of your employee because you have determined the job they were doing is no longer required. The dismissal is the involuntary termination of an employee that is, it is your decision that their employment will end rather than their decision to leave.
A genuine redundancy payment is the excess paid to the employee over what they would have received had they terminated their employment voluntarily.
A redundancy is still considered genuine if you seek expressions of interest from your employees before you decide which employee to dismiss. You do not need approval from us to make a genuine redundancy payment.
Genuine redundancy payments are tax free up to a certain limit, provided certain conditions are met.
To calculate the tax-free limit for an employee, refer to Taxation of termination payments.
An early retirement scheme is a plan that offers employees incentives to retire early or resign when you are rationalising or reorganising your business operations. You must meet certain conditions before we will approve your plan as an early retirement scheme, and you must obtain our approval before you can start such a scheme.
Approved early retirement scheme payments are tax free up to a certain limit, provided certain conditions are met.
For more information about employment termination, genuine redundancy and early retirement scheme payments and how to withhold from these payments, refer to Taxation of termination payments
To work out the amount to withhold from payments you make to your former employees for time worked or leave already taken, use the usual withholding schedules that applied to payments you made to them when they were working for you.
Some employees you make redundant may have unused annual and long service leave you must pay to them when they leave. Special rules apply for withholding from and reporting such payments.
Terminating an employee's employment may affect how tax applies to any shares or rights they have obtained under an employee share scheme.
When an employee leaves, you must ensure you have met your superannuation obligations by making the necessary superannuation contributions to their fund, as required under superannuation guarantee law.