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Understanding the nuances of salary sacrificing around termination payments can be complex. This FAQ is general information only and does not constitute tax or legal advice. If you are unsure, we recommend confirming the intended treatment with the ATO or your accountant before finalising a termination pay.
What is Salary Sacrifice?
Salary sacrifice (also called salary packaging) is an arrangement where an employee agrees to forgo part of their future salary or wages in exchange for benefits of a similar value, commonly extra superannuation contributions.
For the ATO overview, see: Salary sacrificing for employees (ATO).
When is a Salary Sacrifice Arrangement Effective?
The ATO's guidance is that an effective salary sacrifice arrangement is prospective. In practice, it needs to be agreed before the relevant entitlement is earned or becomes payable, and it cannot generally be applied to amounts that have already accrued.
Termination Payments and Salary Sacrifice
When it comes to termination payments, the rules are specific. The ATO Community guidance notes that termination or redundancy payments fall into their own category, and salary sacrifice is not an option for those amounts.
See (updated link): ATO Community: Can someone salary package their termination annual leave or redundancy?.
ETPs and Redundancy Payments
Some termination-related amounts are treated as an Employment Termination Payment (ETP). The ATO states that ETPs made after 30 June 2007 (outside transitional arrangements) cannot be contributed to, or rolled over into, superannuation.
The ATO also lists what is included in an ETP. This includes genuine redundancy payments above the tax-free limit, severance pay, gratuities, and some other payments made in consequence of termination.
If you are dealing with a genuine redundancy, the ATO explains the tax-free component and what does and does not form part of a genuine redundancy payment.
Unused Leave on Termination
Unused leave paid on termination (such as unused annual leave and long service leave) is treated differently to ETPs for tax purposes. Whether any part can be salary sacrificed depends heavily on whether a valid salary sacrifice arrangement was in place before the entitlement accrued, and the specific facts of the arrangement.
For a discussion on salary sacrificing unused leave credits, see: ATO Community: Can a salary sacrifice arrangement for unused leave credits be made at the start of employment?.
Note: some payments on termination may still be considered salary and wages (for example, certain payments in lieu of notice). If an employee already has a valid salary sacrifice arrangement in place before the relevant entitlement is earned, those scenarios may differ. For an ATO Community example discussion, see: ATO Community: Salary sacrificing on termination (discussion).
What Can an Employee Do Instead?
If an employee wants more of their termination payout to end up in super, a common alternative is for them to make a personal contribution to super after they receive the funds, subject to eligibility and contribution caps. The ATO explains personal super contributions and the notice of intent requirements where a deduction is claimed.
- Personal super contributions (ATO)
- Concessional contributions cap (ATO)
- Non-concessional contributions cap (ATO)
How Lightning Payroll Handles This
Lightning Payroll can record a salary sacrifice amount to super in a pay, including where you enter a termination pay. However, we do not determine whether a particular salary sacrifice arrangement is effective for tax purposes, and we do not prevent you from processing a pay based on your chosen treatment.
Because the ATO guidance indicates redundancy and ETP amounts are generally not eligible to be salary sacrificed into super, we recommend you confirm your intended approach with the ATO guidance above and/or your accountant before processing.
Optional reference for employers reporting salary sacrifice in STP: Salary sacrifice reporting in STP (ATO).
