G'day @PayCompliance 👋
Here's an answer you're going to 💗 - it depends!
Let me walk you through PILON (payment in lieu of notice) but before I do, note that it is not EVER reported as Gross! It isn't gross and never has been 😉 It may only be so when you are deducting for lack of notice, if it is permitted in the industrial instrument.
As per the Fair Work Ombudsman guidance, PILON is paid when an employer decides to end their employment without requiring the employee to work through the notice period.
How PILON is treated for tax and reporting depends on a number of factors, however, how it is treated for super is a matter of law, as per the ATO guidance (it's always OTE/QE, regardless of the tax and reporting treatment). From 1 July 2026, you will also include PILON in the QE you will report through STP2 under the Payday Super changes to STP2. That is how the ATO will know 🫣
Let's talk about the tax and reporting treatment for PILON and the factors that determine that treatment:
- Termination Reason/Age -
- genuine redundancy for employees who have not exceeded their age pension age may have the PILON included in the tax-free component of the genuine redundancy and this is reported in STP2 as Lump Sum D.
- The reason I say "may" is because the ATO TR 2009/2 paragraph 55 Step 2 excludes payments in the tax-free component of the genuine redundancy if the payment would be paid for voluntary resignations. For example, some contracts/industrial instruments define that, if a specific type/group/individual resigned, they would be paid PILON on resignation due to the nature of their work. If not specified to be paid on resignation, then it is included in the tax-free component of the GR. If it is to be paid on resignation, it's treated separately as an ETP-Type O 😉
- Note that, if the employee has reached their age pension age, you still apply the ETP cap on the whole ETP amount (that would otherwise be the tax-free component of the GR) and report it as ETP Type R instead of as Lump Sum D.
- dismissal or voluntary resignation - it is treated as an ETP Type O as PILON (positive payments, not deductions) is either the above classification (tax-free component of a GR) or an ETP Type O, as per the STP2 employer guidance
- genuine redundancy for employees who have not exceeded their age pension age may have the PILON included in the tax-free component of the genuine redundancy and this is reported in STP2 as Lump Sum D.
- Tax - clearly, the tax-free component of a GR has no tax withheld, but otherwise ETPs are taxed based on which type of component it is: tax-free component of the ETP or the taxable component of the ETP:
- tax-free component of the ETP - as per the ATO guidance for the invalidity segment or pre-1 July 1983 service
- taxable component of the ETP - as per the ATO ETP tax table that depends on the employee providing a valid TFN, the type of employee (eg WHM), the preservation age of the employee, the reason for termination, the initial or subsequent ETP for the same termination event, if the payment is within 12 months of the termination event and the amount of the payment in relation to the caps. 🤓
Many employers are confused due to the very poor ATO guidance on termination payments. Yes, it's complex, but it would be easier to get right if the ATO had good guidance, specifically for payroll 😁 I live in hope 🤞
Deanne
#PILON
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