i3Group is a well regarded payroll provider, working with businesses to establish and execute compliant payroll systems. While most payroll professionals carry out the standard payroll features you would expect in a small to large business, there are often entitlements and processes that are more complex for a business to manage, including ex gratia payments. i3Group has assisted Australian businesses in navigating end of employment payments, from legal requirements to goodwill gestures.
While the ex gratia payment will vary from employer and context, there are still ex gratia payment rules that need to be compliant under the ATO. If you are looking to learn the ex gratia meaning or understand the circumstances for how to calculate an ex gratia payment, let’s cover the following frequently asked questions:
- What is an ex gratia payment in Australia?
- Are ex gratia payments taxable in Australia?
- What is the difference between an ex gratia payment and a settlement?
- Is unpaid leave payments considered an ex gratia payment?
- Do ex gratia payments go through payroll?
- Do ex gratia terms vary from country, region and industry?
What is an ex gratia payment in Australia?
An ex gratia, or ‘by favour’ as it translates, is the act in which an employer extends a payment to an employee without an obligation to do so. This can be framed as an ex gratia bonus, or it may even be an ex gratia payment on retirement or ex gratia payment to superannuation as a gesture of goodwill. While most ex gratia payments occur as an employment ends or is terminated, they do also occur through an active employment.
Are ex gratia payments taxable in Australia?
Ex gratia payments, if paid following a termination, are tax free, generally speaking. If the ex gratia payment is made through an ongoing employment then they can be taxed. The rate at which these payments are taxed will vary depending on the circumstances of the payment, and the payment amount may also be capped if it exceeds standards set by the Australian Taxation Office. Our payroll consultants can work with you to calculate your ex gratia payment tax and work within the caps to ensure you and your employees benefit from this threshold.
What is the difference between an ex gratia payment and a settlement?
The key difference between an ex gratia payment and a settlement is the expectation of the employer. As the gesture is defined as a favour, there should be no expectation or course of action taken following an ex gratia payment. Comparatively, a settlement payment will come with an expectation from the employee.
Is unpaid leave payments considered an ex gratia payment?
Given that annual leave and long service are employee entitlements, they are not considered an ex gratia payment and should not be extended as an ex gratia bonus. Ex gratia payments should be in addition to the standard payroll terms when employees leave, and should not replace them. Employees can begin to consider and calculate an ex gratia payment once these legal entitlements have been paid.
Do ex gratia payments go through payroll?
All ex gratia payments are managed and processed through payroll and i3Group can assist in establishing these employment benefits and ensure its compliant use. Ex gratia payments can be in addition to standard ETP (employment termination payments), but they will be processed through the employer payroll. If you are looking to incorporate ex gratia payments to your employee termination procedures, our professional payroll team can guide you on how to do so and what caps need to be abided by.
Do ex gratia terms vary from country, region and industry?
Ex gratia payments in Australia are processed through payroll and must abide by the Australian Taxation Office and the relevant cap thresholds. Ex gratia payments may look different for other countries but are standard across the nation. If you have employees in and out of Australia, our i3Group consultants can assist in navigating multiple municipals and country guidelines. Ultimately, the amount and reason for making an ex gratia payment is at the discretion of the employer and so there may be some industries that are more likely to offer this gesture over others.
Interested to learn more about ex gratia payments? Check out our business owner’s guide to ex gratia payments!
i3Group have been assisting small and large businesses with establishing, reviewing and improving payroll systems all over Australia. Talk to our team today about your payroll processes that need refining, and allow our experienced team to provide a tailored approach.