Outstanding payments for time worked up to termination:
All outstanding payments must be paid to an employee upon termination. Payments may include any outstanding ordinary time hours, overtime, allowances, leave taken, bonuses, shift loadings, etc, that would have been payable and treated as normal pay and taxed using the appropriate tax tables.
Other payments can include:
Annual Leave: this is paid at the equivalent rate that the employee would have received had they taken the annual leave. If the employee receives an allowance when taking the annual leave, then it is also to be included in the rate when paid on termination.
Annual leave loading: if the employee received annual leave loading when taking annual leave, then the leave loading is also paid on termination.
Long Service leave: the rate of pay is determined based on the State or Territory legislation which covers the employee. In NSW for example, the rate at which the unused long service leave is paid for employees with irregular hours is either the average weekly ordinary rate of pay earned over the last 12 months or the average weekly ordinary rate of pay earned over the last 5 years, whichever is greater. The rate in NSW also includes the average weekly amount of bonuses received the in last 12 months or 5 years if used earlier. (Please note that bonus payments in NSW are NOT to be taken into account if the ordinary pay (excluding the bonus) is more than $144,000). Please refer to the LSL legislation in your State for a full definition of ordinary pay.
Redundancy pay/Severance Pay:
the respective amount of weeks are paid at the employee’s base rate of pay for ordinary hours of work. Remember it is the employee’s current position that is being made redundant. The amount of redundancy pay (weeks) is determined by the employee’s period of continuous service. For example, although an employee may have had 7 years 4 months service, the payment of 13 weeks’ redundancy pay will relate to the position that is being made redundant and not any of the earlier positions that they may have previously held earlier in their service.
Payment In lieu Of Notice:
A payment in lieu of notice occurs when an employer has decided that an employee is not required to work out their notice period.
The rate of pay for the payment is lieu of notice is paid at the full rate of pay for the hours that the employee would have worked had they been required to work the notice period.
In that respect, the rate may include:
- allowances,
- expected overtime,
- shift loadings.
What payments can I include in the tax-free portion of a redundancy payment?
Remember, the Golden Rule: A payment can only go into Lump Sum D if they are only receiving the payment because the employee is being made redundant.
For example is an employee, was to receive a payment in lieu of notice, whether they resigned or was made redundant, then the payment in lieu of notice cannot be included in the Lump Sum D calculation.
If a receptionist, who would normally be required to work out their notice period, was to receive a payment in lieu of notice due to being made redundant, then the payment could be included in the lump sum D calculation.
To calculate the Lump Sum D threshold, take the:
Completed years of service x $4,891 = $9,780.
For example, if an employee worked 7 years and 4 months, then the calculation for the tax-free threshold (Lump Sum D) would be as follows:
7 x $4,891 = $34,237 + $9,780 = $44,017
This means that any payments up to $44,017 will be tax-free to the employee.
Any excess amount over $44,017 will become an Excluded ETP (Type R) and taxed according to Excluded ETP rules.