When you leave a job whether you resign, are dismissed, or are made redundant some of what you receive is taxable and some may not be. Getting this wrong on your tax return filing creates a liability the ATO will eventually identify, because your employer lodges the same payment information they gave you. This guide cuts through the confusion around Employment Termination Payments so you understand exactly what you are dealing with.
What Is an Employment Termination Payment (ETP)?
An Employment Termination Payment is a payment made because employment has ended. The ATO’s definition is specific: the payment must be made in consequence of termination — not for services performed, not for unused leave entitlements, and not for anything that was part of the ordinary salary structure.
ETPs include golden handshakes, compensation for loss of a job, payments in lieu of notice, non-genuine redundancy amounts, and certain payments made when an employee passes away. They do not include ordinary wages, unused annual leave, unused long service leave, or the tax-free portion of a genuine redundancy.
What Counts as an Employment Termination Payment Under ATO Rules?
The distinction most people miss: a payment in lieu of notice is an ETP. But wages paid for a notice period that was actually worked are ordinary salary income. The difference in tax treatment and the rate can be significant when the notice period is long.
Understanding this distinction before you sign anything is critical. If you are unsure how your payout is structured, it is worth speaking with a registered tax accountant near you before accepting the final figure.
What Are the Two Types of ETP?
Life Benefit ETPs — What Most Employees Receive
A life benefit ETP is paid to a living employee on termination. This is what most dismissed or retrenched employees receive. Life benefit ETPs are taxed at a maximum of 32% including Medicare Levy for those under preservation age, or a maximum of 17% for those at or above preservation age — but only up to the ETP cap. Verify current preservation age and the ETP cap at ato.gov.au.
Death Benefit ETPs
A death benefit ETP is paid to a deceased employee’s estate or dependants when employment ends due to death. Different tax treatment applies depending on who receives the payment and their relationship to the deceased. Executors and dependants who receive these payments should seek specific professional advice.
For complex situations involving estates, superannuation, or self-managed super fund (SMSF) considerations, specialist advice ensures the correct tax treatment is applied from the outset.
What Is the ETP Cap and Why Does It Matter?
The ETP cap for 2024–25 is approximately $245,000. Any ETP amount above this cap is taxed at the top marginal rate plus Medicare Levy — currently 47%. The cap is indexed annually, so confirm the current figure at ato.gov.au.
Most redundancy payments for employees who have not been with an employer for 20 or more years will not exceed the ETP cap. For long-serving senior employees receiving generous packages, this cap becomes highly relevant — the tax on the excess can be substantial and is worth modelling before the package is agreed.
This is exactly the kind of scenario where tax planning before year-end pays for itself. Timing your termination date relative to the financial year and understanding your total income can make a real difference to your after-tax outcome.
How Are Annual Leave and Long Service Leave Taxed at Termination?
Annual leave and long service leave paid at termination are not ETPs. They are taxed as ordinary income, with PAYG withholding applied by your employer at the time of payment.
In practice, this means they are added to your assessable income for the year alongside your salary. A large leave payout in the first half of the financial year when you have not yet earned as much salary produces a different tax result than one paid in June. Timing matters.
Long service leave accrued prior to 16 August 1978 may attract concessional tax treatment in some circumstances. This is increasingly uncommon but worth raising with your accountant if you are a long-serving employee near or at retirement.
What Is the Difference Between Genuine Redundancy and Other Termination Types?
Genuine Redundancy — Position Abolished
The employer eliminates the role. The payment includes a tax-free component based on years of service. The taxable remainder is an ETP. The total tax outcome is generally more favourable than for other termination types.
Dismissal or Resignation
No tax-free component applies. The entire termination payment is an ETP from the first dollar. Settlement payments made to exit an employment relationship are ETPs regardless of what they are called in the paperwork.
Mutual Agreement or Negotiated Exit
This is the grey zone. If you and your employer agree to end the employment and a payment is made, whether it qualifies as a genuine redundancy depends on the substance of the arrangement. The ATO looks at whether the position was genuinely abolished — not whether the word “redundancy” appears in the correspondence.
If your situation is ambiguous, a chartered tax advisor can review the arrangement and confirm whether the genuine redundancy conditions are met before the paperwork is finalised.
What Tax Offsets Apply to ETPs?
The concessional tax rates 32% and 17% operate as a built-in offset. Rather than being taxed at your full marginal rate, the ETP is taxed at the capped concessional rate up to the ETP cap. Your employer should withhold tax at the correct concessional rate when paying your ETP.
If they withhold at the wrong rate — too high or too low — this is corrected in your annual tax return. Your tax agent ensures the offset is applied correctly and that the employer’s withholding matches what was required under the ATO rules.
What Mistakes Do Employees Commonly Make With Termination Pay?
- Assuming the entire payment is tax-free because it is described as a redundancy
- Not checking whether unused leave was paid and taxed separately from the ETP
- Failing to keep the payment summary or income statement from the employer
- Not accounting for the termination payment when estimating annual income for HECS or Medicare Levy Surcharge purposes
- Agreeing to a total package figure without calculating the after-tax amount first
If you have questions about your specific situation before you sign, these are the right questions to raise with your accountant before the termination date is locked in.
What Mistakes Do Employers Make When Processing ETPs?
- Classifying a termination as a genuine redundancy when the role was not genuinely abolished
- Applying PAYG withholding at the standard income rate rather than the concessional ETP rate
- Including unused leave in the ETP rather than taxing it separately as ordinary income
- Not providing the employee with the correct payment summary or income statement breakdown
- Errors in Single Touch Payroll reporting that create discrepancies in the ATO’s records
For business owners managing their own payroll, ETP processing sits alongside broader company tax obligations that need to be handled correctly every financial year. Getting ETP withholding wrong triggers ATO scrutiny not just on the termination payment but on your payroll compliance generally.
Frequently Asked Questions
Is all termination pay taxable in Australia?
Most termination pay is at least partially taxable. The exception is the tax-free component of a genuine redundancy payment, which is based on years of service. Beyond that, termination payments are taxed as Employment Termination Payments at concessional rates. Annual leave and long service leave paid at termination are taxed as ordinary income. There is no blanket tax-free treatment for all termination pay.
What is the tax rate on an ETP in Australia?
For employees under preservation age, the maximum ETP tax rate is 32% — 30% income tax plus 2% Medicare Levy. For those at or above preservation age, it is 17% — 15% plus 2%. These concessional rates apply up to the ETP cap. Above the cap, your full marginal rate applies. These are the 2024–25 rates — verify current figures at ato.gov.au.
What does my employer need to give me when I receive an ETP?
Your employer must provide a payment summary or income statement showing the ETP amount, the tax withheld, and whether it is a life benefit or death benefit ETP. You need this document to lodge your tax return accurately. If your employer has not provided it, request it — they are legally required to issue it.
Can I avoid tax on a termination payment by rolling it into super?
ETPs cannot be rolled into superannuation directly. However, if you are of preservation age and have available concessional contribution capacity, you may be able to make voluntary super contributions with other funds to manage your overall tax position. This kind of planning needs to happen before the termination is finalised — it cannot be structured retrospectively.
Where can I find a tax accountant near me in Melbourne’s north?
RPS Accountants is based in Epping and serves Melbourne’s northern suburbs corridor — including Thomastown, Lalor, South Morang, Bundoora, Mill Park and Whittlesea. If you need a tax accountant in Epping or nearby, our registered tax agents specialise in individual and business tax — including ETP calculations, redundancy tax advice, and payroll compliance.
