Employment termination payments

Employees who cease work with your business may be entitled to an employment termination payment (ETP).

An ETP is a lump sum payment that must be made within 12 months of an employee’s termination to receive concessional tax rates. If the payment is made outside the 12 month period, it is included in the employee’s assessable income and taxed at marginal rates.

It is the responsibility of employers to work out the tax on the ETP and issue a separate PAYG Payment Summary where an ETP has been made. The ETP Payment Summary must be supplied to the employee within 14 days of making the payment and lodged with their income tax return.

An ETP may include payment in lieu of notice, a gratuity or ‘golden handshake’, compensation for the loss of a job, unused rostered days off or unused sick leave, or certain payments after the death of an employee.

An ETP is subject to two caps to qualify for the concessional rates of tax: the ETP cap and the whole-of-income cap.

ETP cap

The ETP cap applies to all ETP and has a threshold that is indexed annually. The ETP cap applies only to excluded payments, such as:

  • genuine redundancy payments and payments that would have been genuine redundancy had the employee not reached the retirement age
  • early retirement scheme payments
  • invalidity payments
  • compensation payments principally for personal injury, unfair dismissal, harassment or discrimination
  • payments that do not meet the ETP rules

The ETP tax rate is dependent on whether the employee is under or over the preservation age. Employees who have reached the preservation age or over are taxed at a maximum rate of 15 per cent plus 2 per cent Medicare levy. Employees under the preservation age are taxed at a maximum rate of 30 per cent plus 2 per cent Medicare levy.

Both employees under or over preservation age may be taxed up to 47 per cent plus 2 per cent Medicare levy, if amounts exceed the ETP cap.

Whole-of-income cap

The whole of income cap is a non-indexed cap that applies to some ETPs and works in conjunction with the ETP cap. The cap has $180,000 limit that can only be applied to non-excluded ETPs, which include:

  • non-genuine redundancy payments
  • golden handshakes
  • payments for rostered days off
  • payment for unused sick leave
  • gratuities

With the whole-of-income cap other income received during the year is deducted from the cap before applying the cap to the ETP, and will reduce the component of the ETP subject to concessional tax rates.

Cristy Houghton