A Gratuity Payment (also commonly known as 'Ex Gratia Payment' or 'Golden Handshake') is a lump sum payment agreed between an Employer and an Employee to settle the end of an Employment relationship.

There are a number of reasons why an Employer may offer a Gratuity Payment to an Employee upon termination, including:

• enforcing a voluntary cessation where a termination could lead to a case of Unfair Dismissal;
• compensating victims of a class action-action suit;
• rewarding an employee leaving Employment on good terms (i.e. moving overseas);
• rewarding an employee retiring from Employment.

Tax Treatment of Gratuity Payments

Gratuity Payments are deemed as Employment Termination Payments (ETP). Commonly, these payments are Taxable ETPs, unless a portion of the Gratuity Payment, relates to a period of employment completed prior to the 1st July 1983. In this case, this portion is Tax-Free.

For example. In 2020 Sam has submitted his resignation to go into voluntary retirement. Sam worked for ABC Construction for 50 years (from 1970 - 2020). The Directors at ABC Construction decided to pay Sam a gratuity payment of $1,000 for each year of service ($50,000). The Gratuity payment will be taxed as follows:

• $13,000 covering the period from 1970 - 1983 > ETP Tax-Free
• $37,000 covering the period from 1984 - 2020 > ETP Taxable

Set Up a Gratuity Payment Pay Item

1. From the Organisation Menu, go to Settings > Payroll Settings
2. Select the [Pay Items] >[Earnings] Tab
3. Click on [Add] > Employment Termination Payments
   
   

   è  The Employment Termination Payment Pay Item screen opens
   
   
   
   

4. Select/Enter the following details:
   • Earnings Name                > Type: Gratuity Payment
   • Display Name                  > Type: Gratuity Payment
   • Rate Type                       > Select: Rate per Unit
   • Expense Account             > Select: Wages & Salaries
   • ETP Type                        > Select: Type O
   • Exempt from Super          > Select this option
   • ETP tax-free component   > Do not select this option
   • Reportable as W1            > Select this option
5. Click on [Add]
   Note: if you are required to pay a portion of the Gratuity Payment tax-free, you will need to create a separate Gratuity Payment Pay Item the same way as the previous one. However, this time you would select the option: ETP tax-free component.