When an employee or independent contractor stops working for your business, your obligations don’t end immediately. You may need to process final payments, report them correctly to the Australian Taxation Office (ATO), and ensure compliance with superannuation and fringe benefits tax (FBT) requirements.
Failing to meet these obligations can result in penalties and compliance issues. This guide breaks down what small business owners need to do when a worker leaves.
1. Employment Termination Payments (ETPs)
When an employee leaves, you may need to make an Employment Termination Payment (ETP). ETPs can include:
- Unused leave payouts – Payment for accrued annual leave and long service leave.
- Genuine redundancy payments – Tax-free up to a certain limit.
- Compensation for loss of employment – Payments for wrongful dismissal or early contract termination.
- Other termination benefits – Bonuses or ex gratia payments.
How to Tax and Report ETPs
- Different ETPs are taxed at different rates depending on the employee’s age and years of service.
- You must withhold the correct amount of tax before paying the employee.
- Report the ETP through Single Touch Payroll (STP) or in a payment summary if STP is not used.
2. Reporting Termination Payments to the ATO
The ATO requires businesses to report all payments made to a departing employee. Here’s how to stay compliant:
Using Single Touch Payroll (STP)
- If your business uses STP, report the termination payments and the termination date in your final STP submission for that employee.
- If STP is not available, provide the employee with a PAYG payment summary – employment termination payment (ETP) and report it to the ATO.
3. Meeting Superannuation Guarantee (SG) Obligations
Superannuation must be paid on an employee’s ordinary earnings, but not all termination payments attract super.
Super is required on:
- Final wages and salary
- Unused annual leave and long service leave (if it’s part of an employee’s regular pay cycle)
Super is NOT required on:
- Genuine redundancy payments
- Compensation for unfair dismissal
- Unused annual leave paid in a lump sum
To ensure compliance:
- Make all super payments by the due date (usually the 28th day of the following quarter).
- Use the Superannuation Clearing House or your business’s super fund to process final payments.
4. Meeting Fringe Benefits Tax (FBT) Obligations
If your business provides non-cash benefits to a departing worker, you may need to pay Fringe Benefits Tax (FBT).
When Does FBT Apply?
- If you allow an employee to keep a company car or laptop after they leave.
- If you provide discounted goods or services as part of an exit package.
- If you offer extra benefits as part of a redundancy package.
To report FBT correctly:
- Determine the taxable value of the fringe benefits.
- Lodge an FBT return if your business provides benefits above the threshold.
- Keep records for at least five years to comply with ATO rules.
When an employee leaves, there’s more to consider than just a farewell—tax and superannuation compliance can get tricky. A misstep in reporting could mean penalties or unexpected financial stress.
At Chan & Naylor, we make it easier for small business owners to stay on top of their tax obligations. Our experts are here to help you handle things smoothly.
Let’s keep your business compliant and stress-free. Get in touch with Chan & Naylor today.
About Chan & Naylor
Established in 1990, Chan & Naylor has been a trusted partner for thousands of businesses and investors across Australia. Based in Sydney, we provide expert accounting services tailored to your needs. Choosing Chan & Naylor means you’re not just selecting a service provider; you’re gaining a partner aligned with your business goals. You’ll have access to a dedicated client manager supported by a team of accountants that specialises in business tax and investments. Contact us today so we can discuss how we can help you.
Disclaimer
This article serves as general information only and may not account for the unique circumstances of individual readers. For personalised and strategic solutions tailored to your specific situation, we invite you to seek professional advice from Chan & Naylor. Our highly experienced team is dedicated to helping you navigate the complexities of Australian taxation, ensuring that your financial strategies align with the latest regulations. Contact us today to embark on a path of informed and customised tax planning for your property investments.
