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Termination a taxing time

A STATE Government move to cash in on the golden handshakes given to executives is going to increase the cost of sacking staff, potentially from July 1.

As part of its new business tax package the Government is planning to apply payroll tax to eligible termination payments (ETP) from that date.

The tax package is currently before the parliament and the Government hopes to have it passed soon.

In a redundancy package there may be three components – accrued annual leave, any long service leave owing and a cash payment. The cash payment is often the ETP.

Both accrued annual leave and long service leave payments have been subject to payroll tax for some time.

A spokesman for Treasurer Eric Ripper said the ETP move was aimed at taxing large executive redundancy payouts and at broadening the payroll tax base.

Halsey and Associates partner Fiona Halsey said that from July 1 any business with an annual payroll of more than $750,000 could have to pay a 6 per cent tax on ETPs.

“This means it will be in the interest of employers who are paying ETPs to make the payments before July 1. That could pose problems for any employees who are facing being made redundant,” she said.

“From a payroll tax paying employer’s point of view, there are only very limited circumstances where they can dismiss someone after July 1 without attracting payroll tax on the ETP. Therefore they may wish to bring forward any redundancies to before that date.”

Another concern to employers is the WA Industrial Relations Commission’s recent decision to award compensation to a terminated employee, even though his contract of employment did not include a redundancy clause.

Some legal experts believe this compensation could be classed as an ETP and therefore attract payroll tax.

Ms Halsey said that from an employee’s point of view it was often better to extend the period of employment into the new financial year.

If the ETP is received in a new income year then the employee has more chance of at least the amounts of accrued annual leave being taxed at a lower rate.

Where there has been a bona fide redundancy scheme or approved early retirement scheme, the employee is often aiming for maximum years of completed service because the ETP is concessionally taxed and the level of concessional tax depends on the completed years of service.

If the employee is about to turn 55 then he or she will be keen to remain employed to age 55. This can result in a 15 per cent difference in tax.

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