Termination and Age: What Payroll Needs to Check

When processing a termination, the employee’s age at the time of dismissal affects several different calculations. Here’s a plain-language breakdown of the four age-related issues payroll needs to check on termination.

Notice — additional week for employees over 45

Under s.117 of the Fair Work Act 2009, employees who are over 45 years old and have completed at least two years of continuous service with the employer are entitled to an additional week of notice on top of the standard notice period (or payment in lieu).

How to determine age: The employee’s age is measured at the date the notice of termination is given – not at the end of the notice period, and not at the date of dismissal. If the employee is 44 on the day notice is given but will turn 45 before their last day of employment, the additional week does not apply.

Employment Termination Payments – Preservation age

When an employee receives a post-June 1983 ETP component, the payment is taxed at a lower concessional rate if the employee has reached their preservation age.

The preservation age is not a fixed number.

It has increased progressively from 55 to 60 over time. For employees born after 30 June 1964, the preservation age is 60. For older cohorts, refer to the ATO’s preservation age table:

How to determine age: The employee’s age is measured at the end of the financial year in which the payment is made – not at the payment date itself. If the employee is below preservation age on the date of payment but will reach preservation age before 30 June of that financial year, the lower concessional rate applies. (s.82-10(3)(a) of the Income Tax Assessment Act 1997)

The practical implication: Many employees who received ETPs in 2018 would have been assessed against a preservation age of 55. Today, most working-age employees, particularly anyone born after 30 June 1964, have a preservation age of 60. Make sure your payroll software is using the correct table.

Genuine Redundancy – Pension age threshold

When a position is genuinely redundant, the employee may be eligible for concessional tax treatment on the redundancy payment. However, this concession does not apply if the employee has reached their pension age at the date of dismissal.

Note: Prior to October 2019, the threshold was a fixed age of 65. This changed on 29 October 2019 when legislation replaced the fixed age of 65 with each employee’s individual pension age under the Social Security Act 1991. Pension age is currently 67 for most people born on or after 1 January 1957. See the pension age table in the Alltech article on Redundancy and Pension Age for the full breakdown.

How to determine age: The employee’s pension age eligibility is assessed at the date of dismissal. (s.83-175(2)(a) of the Income Tax Assessment Act 1997)

Additional note: If the employee’s contract or the applicable industrial instrument requires them to terminate at a particular age that is earlier than their pension age, or upon completing a particular period of service, the tax concessions will also not apply once that age or period has been reached.

Approved Early Retirement Schemes and Invalidity

The same pension age threshold applies to approved early retirement schemes. The dismissal must occur before the day the employee reaches pension age (or an earlier mandated age/service date if applicable). (s.83-180(2)(a) of the Income Tax Assessment Act 1997)

For invalidity payments, the employment must stop before the employee’s “last retirement day” as defined in s.995-1 of the Income Tax Assessment Act 1997:

• If the employee’s employment or office would have terminated when they reached a particular age or completed a particular period of service – the last retirement day is the day they would have reached that age or completed that period; or
• In any other case – the day on which they would reach pension age.

(s.82-150(1)(c) of the Income Tax Assessment Act 1997)

Summary — which age, measured when

Thinking about outsourcing your payroll?

Age-related calculations at termination – notice entitlements, ETP tax rates, preservation age, and pension age, are some of the most common sources of payroll error.

At Alltech, we manage payroll for 150+ businesses across Australia, including end-to-end termination and redundancy processing. Get in touch to find out how outsourced payroll works and whether it’s right for your business.