AM MAGAZINE SHELL - Australian Automotive Aftermarket Magazine

HR
TAX ON LEAVE ENTITLEMENTS
UPON TERMINATION
Employers are often confused about how to tax leave entitlements, such as annual
leave and long service leave on termination. This article clarifies how to tax such
entitlements.
David Wilkinson
AAAA Industrial, Relations Manager
Phone 1300 735 306 Fax 02 9993 9709
Email hr@aaaa.com.au
CALCULATION METHOD
• Calculate the gross amount of leave
entitlements owing to the employee
• Divide the gross amount owing by 52
• Add the amount to the normal weekly
amount
• Find tax on the new amount
• Find tax on regular weekly amount
• Find difference in tax amount
• Multiply difference by 52: this is the
amount of tax
CASE STUDY:
Employee earns gross per week - $700
(hourly is $18.42)
Tax (with leave loading) - $99
Net payment weekly - $601
On termination, the employee has
121.69 hours worth of annual leave.
For this particular employee, leave
loading is not be payable upon
termination.
121.69 x $18.42 = 2241.53
$2241.53 / 52 = 43.11
$43.11 + $700 = 743.11
New weekly tax rate on $743.11 = 113
$113 - $99 = $14
$14 x 52 = $728
Therefore
Gross termination payment = $2241.53
Tax on termination payment = $728
Net termination payment =$1513.78
TAX ON REDUNDANCY PAYMENTS
Genuine Redundancy Payments are tax
free up to a limit ($7350 plus $3676 for
each completed year of service to which
the payment relates - for 2008/2009,
indexed annually).
A genuine redundancy payment is one
“received by an employee who is
dismissed from employment because the
employee’s position is genuinely
redundant”. There are four necessary
components to a genuine redundancy.
These include:
1. The payment being tested must be
received in consequence of an
employee’s termination.
2. The termination must involve the
employee being dismissed from
employment.
3. The dismissal must be caused by the
redundancy of the employee’s position.
4. The redundancy payment must be
made genuinely because of a
redundancy.
The dismissal must be
caused by the redundancy
of the employee’s position
The genuine redundancy payment is
the amount that exceeds the amount that
could reasonably be expected to be
received had the employee voluntarily
terminated his or her employment (for
example, if the employee resigned, and
would be entitled to $3000, this would
not be included in the calculation of the
tax free amount).
OTHER CONDITIONS THAT
MUST BE SATISFIED
• the employee must be less than 65 at
the date of dismissal (or a lower age if
their retirement is to be at a lower age)
• the termination is not at the end of a
fixed period of employment
• if the employer and employee are not
dealing with each other at arm’s length
(e.g. they are related to each other), the
payment is not greater than the amount
that could reasonably be expected to
have been paid if they had been
dealing with each other at arm’s length
• there is no arrangement between the
employer and employee for the
dismissed employee to be re-employed
after the termination — this condition
would not prevent the former employee
being engaged as an independent
contractor
• The payment is not in lieu of
superannuation benefits.
CASE STUDY
John’s position becomes redundant
when the customer service division of his
employer is outsourced. John is aged 51
and has worked for his employer for 18
years and five months. The $90,000
redundancy payment that he is paid on
May 1, 2009 satisfies the conditions set
out.
The redundancy payment is taxed as
follows.
1. No part of the $90,000 is taxed under
other rules. Although John may receive
a payment for unused leave or in lieu
of notice, for example, as long as this is
a separate payment it is taxed under its
own rules and does not need to be
separated from the redundancy
payment.
2. The tax free amount of the redundancy
payment is:
$7350 + $66,168 ($3676 x 18 years)
= $73,518
The $16,482 in excess of the tax free
amount ($90,000 – $73,518) is taxed as
an employment termination payment.
Because John is aged 51 at the time of
payment, the $73,518 is included in his
assessable income and taxed at his
ordinary tax rates but with a maximum rate
of 31.5 percent.
DO YOU HAVE A QUESTION YOU REALLY WANT TO ASK?
For more information and assistance phone: AAAA HR Hotline on 1300 735 306 or email hr@aaaa.com.au
The material contained in this publication is general comment and is not intended as advice on any particular matter. No reader should act or fail to act on the basis of any
material contained herein. The material contained in this publication should not be relied on as a substitute for legal or professional advice on any particular matter. Wentworth
Human Resources Pty Limited (the publishers), the editor and the authors expressly disclaim all and any liability to any persons whatsoever in respect of anything done or omitted
to be done by any such person in reliance whether in whole or in part upon any of the contents of this publication. Without limiting the generality of this disclaimer, no author or
editor shall have any responsibility for any other author or editor. © Wentworth Human Resources Pty Ltd 2009
Before acting on any of the information in the above article,
please contact David or any of the friendly team at the AAAA
HR Advisory Service on phone: 1300 735 306, fax: 02 9993
9709, or email: hr@aaaa.com.au The AAAA HR Advisory
Service is available from 8:30 am – 5:00 pm, Monday to
Friday. The answer could be just a phone call away!
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