ETP caps
There are 2 caps:
- ETP cap – this is
- indexed each year. In 2023–24 it's $235,000.
- reduced by any earlier ETPs paid in the same income year and by any earlier ETPs for the same termination, regardless of when they are paid.
- Whole-of-income cap – this is
- $180,000
- reduced by any other taxable payments (such as salary and the taxable components of any earlier ETPs) received by the employee in the same income year.
The cap which applies depends on the type of payment. For example, a genuine redundancy payment and a 'golden handshake' may be subject to different caps.
Which cap to apply
Which cap applies depends on the type of payment.
The ETP cap applies to 'excluded payments'. These include:
- genuine redundancy and early retirement scheme payments that exceed the tax-free limit. Only the amount in excess of the limit is subject to the cap.
- payments that would have been for a genuine redundancy had the employee not reached their retirement age or age-pension age
- invalidity payments. Only the amount not included in the tax-free component is subject to the cap.
- compensation payments principally for personal injury, unfair dismissal, harassment or discrimination
- death benefit ETPs.
The lesser of the ETP cap and the whole-of-income cap should be applied to all other 'non-excluded payments'. These include:
- golden handshakes and gratuities
- non-genuine redundancy payments (unless it would have been a genuine redundancy, had the employee not reached their retirement or age-pension age)
- payments in lieu of notice
- payments for unused sick leave or unused rostered days off.
In the majority of cases, the whole-of-income cap will be less, so it will apply to these payments.
The only exception is if you make multiple payments to the employee for the same termination. The ETP cap is reduced by the other payments – even if they occur in different income years – and could then be lower than the whole-of-income cap.
Categorising payments
In some circumstances, a non-excluded payment, such as unused sick leave, may be classified as excluded and subject only to the ETP cap. You need to categorise each payment as excluded or non-excluded based on the following factors:
- the employment conditions – for example, what you're reasonably required to pay under the industrial agreement or employment contract for that termination type
- whether the payment is extra, discretionary or separate to what is reasonably required for that particular type of termination.
This example shows how a payment for unused sick leave may be classified as an excluded payment. Other non-excluded payments may be classified as excluded in similar circumstances.
Compensation payments
Payments that are made mainly to compensate an employee for a genuine dispute from personal injury, unfair dismissal, harassment or discrimination are excluded from the whole-of-income cap.
A payment does not need to be made as a result of proceedings before a court to be deemed as compensation. The employee or employer should keep evidence to show that a genuine dispute existed.
Example 1: Compensation for unfair dismissal
Julie’s employment was terminated by her employer. Julie has evidence that she was unfairly dismissed because of her strong union affiliation and disputes her termination by engaging a lawyer to act on her behalf.
The lawyer negotiates a $20,000 out-of-court settlement with Julie’s employer for unfair dismissal.
Although Julie’s complaint did not go to court, there was a genuine dispute between Julie and her employer that resulted in compensation for her unfair dismissal. Her payment of $20,000 is a compensation payment. It will be subject to the ETP cap and excluded from the calculation of the whole-of-income cap.
End of example
Example 2: Compensation for harassment and discrimination
Monica’s employment was terminated in September 2023 because of alleged poor work performance. Monica feels that she was unfairly dismissed, believing that her dismissal was actually as a result of a harassment claim she lodged against her manager. She takes court action against her employer and receives a payment of $150,000. Monica has other taxable income of $100,000.
As the payment is a result of the termination of her employment and made to compensate her for harassment and discrimination, it is subject to the ETP cap and excluded from the whole-of-income cap.
The ETP cap for 2023–24 is $235,000. Therefore, the entire $150,000 of her compensation payment will receive concessional tax treatment, regardless of her other income.
End of example