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  • How your termination payments are taxed

    The tax treatment of your termination payments depends on the type of payment, how your employment was terminated, and your age.

    Payments for unused annual and long service leave may be concessionally taxed, depending on how your employment is terminated and when you accrued the leave (these payments are not part of your ETP).

    Genuine redundancy and early retirement scheme payments are tax free up to a limit based on your years of service (the tax-free amount is not part of your ETP).

    Payments that are part of your ETP include gratuities and severance pay.

    Your ETP will have a tax-free component if part of the payment is for invalidity or work done before 1 July 1983.

    The remainder of your ETP is concessionally taxed up to certain limits, called 'caps'. The top rate of tax applies to amounts paid in excess of these caps.

    The ETP cap amount for the 2019–20 income year is $210,000. This amount is indexed annually.

    The whole-of-income cap amount for the 2019–20 income year is $180,000. This amount is not indexed. This cap is reduced by any other taxable income payments you receive in the income year.

    The concessional tax rate is 17% if you've reached your preservation age and 32% if you haven't, up to the relevant cap. Amounts above the caps are taxed at 47% (see Table A: Withholding rates for ETPs).

    The cap that applies to you depends on the type of termination, for example:

    • if the termination is a genuine redundancy, the part of your ETP that is concessionally taxed will be limited by the 'ETP cap'
    • if you resign, the part of your ETP that is concessionally taxed will usually be limited by the 'whole-of-income cap'.

    If the whole-of-income cap applies to your ETP and you earn more income in the same financial year that your employment is terminated, you may need to pay more tax on your ETP when you lodge your tax return. Your employer can tell you whether the whole-of-income cap applies to your ETP.

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      Last modified: 01 Jul 2020QC 50513