If your employment is terminated, certain payments for unused annual leave and long service leave may receive concessional tax treatment and be taxed at rates up to 32%. These amounts are separately recorded on your PAYG payment summary – individual non-business and on your tax return.
Lump sum payments for unused leave are shown either:
Lump sum payment D
Any genuine redundancy or early retirement scheme payments that are shown at lump sum D on your PAYG payment summary – individual non-business are not assessable payments and should not be shown anywhere on your tax return.
Lump sum payment E
These payments relate to an earlier income year (or years) and return-to-work payments, and are shown at lump sum E on your PAYG payment summary – individual non-business. They are assessable payments and need to be declared on your tax return.
For the tax rates for accrued leave, see Unused leave payment tax table.
Tax treatment of ETPs
ETPs can be made up of a tax-free component and a taxable component.
The tax-free component of a life benefit termination payment is both the:
The tax-free component is not assessable income and is not exempt income – that is, you do not pay tax on this part. Your employer will record it on your ETP payment summary, but you do not need to show it on your tax return.
Before July 1983 part
An ETP includes a ‘before July 1983 part’ if any of the employment to which the payment relates occurred before 1 July 1983. The amount of the before July 1983 part is worked out using the method below:
Step 1: Subtract the invalidity part from the ETP.
Step 2: Multiply the amount at step 1 by the fraction:
Number of days of employment to which the payment relates before 1 July 1983 divided by the total number of days of employment to which the payment relates
An invalidity segment is part of an employment termination payment (ETP) you receive from your employer as a result of sustaining a permanent disability.
You will receive an invalidity segment if your employment ceased as a result of ill health and two medical practitioners have certified that it is unlikely you can ever be gainfully employed in the capacity for which you are reasonably qualified.
The invalidity segment of your ETP is calculated as the portion of your ETP that represents the time between the day your employment stopped and the day you would have retired. Generally, the day you would have retired is the day you turn 65 years old, or when you would have completed your period of service.
The invalidity segment of your ETP is tax free. You can work out the invalidity segment of your ETP using the following invalidity formula:
Amount of employment termination payment
Days to retirement*
Employment days** + Days to retirement
* Days to retirement are the number of days from the date of termination to the day you would have retired – this is generally the day you turn 65 years old.
** Employment days are the number of days of employment up to the date of termination.
We have a worksheet to help you work out an invalidity segment payment
Employment termination payment with an invalidity segment worksheet (NAT 71949)
The taxable component is the whole payment minus any tax-free component.
The taxable component is assessable income and is included on your tax return, but is generally taxed at a lower (concessional) rate up to certain limits – these limits are called caps.
For information about the ETP tax caps, see ETP caps that apply.
For the tax rates for ETPs, see How do you show the ETP on your tax return?
Your PAYG payment summary – employment termination payment will show the
tax-free and taxable component of your ETP.