Employment termination payments
An employment termination payment (ETP) is a lump sum payment made as a result of the termination of a person's employment.
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Tax on an ETP
ETPs have up to 3 parts:
- tax-free
- concessionally taxed (generally taxed at a lower rate than your marginal tax rate)
- taxed at your marginal tax rate.
The rate of tax you pay depends on the type of payment you receive. The payment is taxed in the year you receive the payment. You can't roll over your ETP to your superannuation.
Your ETP is concessionally taxed if it is received within 12 months of your termination. There are different caps on the concessional treatment of ETPs paid to you or your dependants.
Amounts to include and exclude from an ETP
An ETP can include:
- payments for unused sick leave or unused rostered days off
- payments in lieu of notice
- a gratuity or 'golden handshake'
- an employee's invalidity payment (for permanent disability, other than compensation for personal injury)
- compensation for loss of job or wrongful dismissal
- genuine redundancy payments
- early retirement scheme payments that exceed the tax-free limit
- certain payments made after the death of an employee
- the market value of the transfer of property (less any consideration given for the transfer of this property).
ETPs don't include:
- lump sum payments for unused annual or long service leave
- the tax-free part of a genuine redundancy payment or an early retirement scheme payment
- superannuation benefits (for example, a lump sum or income stream from a super fund)
- foreign termination payments.
Accrued leave
If you receive an ETP, your employer will also pay out any unused annual or long service leave. Lump sum payments for unused annual leave and long service leave don't form part of your ETP.
Your employer will record payments of unused leave separately on your income statement or PAYG payment summary – individual non-business at lump sum A or B.
These payments may be concessionally taxed. The tax withholding rate depends on the:
- type of termination
- date of accrual
- type of leave.
Other amounts
Your employer may pay you other amounts that are not redundancy benefits or accrued leave. A common example is a payment for a non-genuine redundancy.
Other examples include gratuities, golden handshakes and severance pay.
We treat these payments as an ETP, which means they are concessionally taxed.
If your employment is terminated because of ill health, or part of your payment relates to your employment before 1 July 1983, some of your payment may be exempt from tax.
An employment termination payment (ETP) is a lump sum payment made as a result of the termination of a person's employment.