• Taxation of termination payments

    Overview

    When an employee leaves work or changes jobs, they may receive different types of payments that are taxed differently. This guide provides information about the tax on the different types of payments.

    If you are an employer

    Issues you need to consider include working out the amount to withhold from an employment termination payment (ETP) and how to complete the payment summary.

    If you are an employee

    The payment types and tax treatment of each payment will depend on how your employment was terminated – for example, whether you resigned or whether your job became redundant.

    Employment termination payments

    An employment termination payment (ETP) is a payment given to an employee, or another person, as a result of the termination of the employee’s job. To be an ETP (and receive concessional tax treatment) the payment must generally be made within 12 months of termination. Payments made outside the 12-month period will be included in your assessable income and will be taxed at your marginal tax rates. The 12 month rule does not apply to the taxable component of genuine redundancy payments and early retirement scheme payments.

    Whole-of-income cap

    On 1 July 2012, the concessional tax treatment for employment termination payments (ETPs) changed. Depending on the type of ETP, the concessional tax treatment may now be limited to the smaller of either the ETP cap or the whole-of-income cap. Amounts paid in excess of these caps are taxed at the highest marginal rate.

    Death benefit ETP

    A death benefit ETP is an ETP you receive from another person's employer after the death of that person.

    Tables

    We provide tables to assist you to work out the applicable tax rates that apply to some termination payments you receive when you leave work.

    • Last modified: 16 Apr 2014QC 26218