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Salary Sacrifice – Does it apply to Employment Termination Payments?

We recently acted for a Not For Profit organisation in a Fair Work Commission dispute. There was an issue related to the payment of an Employment Termination Payment (‘ETP’) to the terminated employee, namely whether ETPs can be salary sacrificed?

Salary Sacrifice Arrangement

A salary sacrifice arrangement (‘SSA’) or salary packaging or total remuneration packaging is a formal arrangement between an employer and an employee, where the employee agrees to receive a lower amount of pay each pay period in return for the employer providing them with benefits of a similar value to the reduction in pay.

The requirements for an effective SSA are:

  • The arrangement should be entered into before work is performed.
  • There should be no access to the sacrificed salary (that is the employee has to permanently forgo the sacrificed salary).

A common SSA is to salary sacrifice future wages into superannuation.

Employment Termination Payment (ETP)

An ETP is a lump sum payment made as a result of the termination of a person’s employment. The Australian Taxation Office (‘ATO’) provides a list of payments that are deemed to be included in an ETP. Importantly, ETPs do not include salary, wages or accrued leave payments for unused annual leave and long service leave. It is important to note that there is a difference between an ETP and other payments made at the end of an employment (such as unpaid accrued annual leave).

Does an SSA apply to ETP?

In short, the answer is no. The ATO is of the view that ETPs should not be subject to an SSA, as reflected in various rulings and the ATO’s stand that an ETP must not be rolled over into superannuation. The main issue is that ETPs are not deemed ‘salary and wages’ for the purpose of salary sacrifice and should not form part of the SSA.

It is important for employers to understand the type of payments that can be salary sacrificed at termination and that ETPs should not form part of that arrangement.

Checklist for employers:

When an exiting employee requests that any payments made at termination be salary sacrificed, ask yourself these questions:

  1. Has there been an effective Salary Sacrifice Arrangement?
  2. Are the payments made at termination part of the Salary Sacrifice Arrangement?
  3. Were the payments accrued only after the Salary Sacrifice Arrangement was agreed?
  4. Will any ETP be paid to the employee – if so, this cannot be salary sacrificed.

If you have exiting employees seeking to salary sacrifice their termination payments and you are unsure about the payments that can be salary sacrificed or require any further advice, please contact Adam Foster (Head of Workplace Relations) at adamf@lewisholdway.com.au or Adren Choon (Lawyer) at adrenc@lewisholdway.com.au or on (03) 9629 9629.