Payments made as a consequence of the termination of employment which are ETPs are taxed according to the nature of the payments.
Specific kinds of employment termination payment get special treatment, depending on when and how they are paid, and specifically what for:
- Tax On Redundancy Payments (including early retirement schemes)Redundancy tax on genuine loss-of-job payments is concessionary. To determine the tax, payments must be analysed into categories.
- Invalidity PaymentsWhen an employee retires because of invalidity, that part of the Employment Termination Payment (ETP) which relates to the period until normal retirement date, is the tax free invalidity component.
- Death Benefit Employment Termination PaymentsDeath Benefit Employment Termination Payments have differential concessional tax treatment depending on whether paid to a dependent or non-dependents.
- Long Service Leave PaymentsLeave is specifically excluded from the concessional ETP rules however if paid in a lump sum, there may be opportunities to influence the tax outcome.
- Annual Leave
Leave is excluded by definition as an Employment Termination Payment, but concessional tax treatment may apply in some limited circumstances.
- Transitional Termination PaymentsTransitional termination payments were those made between 1 July 2007 and 30 June 2012 which could be rolled over into a super fund or used to buy an annuity.
The ETP payg withholding rates for the year ending 2018
The PAYG tax withholding on termination payments are set out in Schedule 11 Tax Table for employment termination payments (includes ETP and Whole of Income caps example calculations).
|Schedule 11 ‘Table A’ Withholding (payg) rates on ETPs|
|Income component||Age at year end||Component||Withholding Rate||Applicable Cap|
|Life benefit ETP taxable component due to early retirement scheme, genuine redundancy, invalidity, compensation for personal injury, unfair dismissal, harassment or discrimination.||Under preservation age||Up to the cap||32%||ETP cap|
|Preservation age or over||Up to the cap||17%||ETP cap|
|All ages||Above the cap||47%||ETP cap|
|Life benefit ETP taxable component which is a ‘golden handshake’, non-genuine redundancy payment, severance pay, a gratuity, in lieu of notice, for unused sick leave or for unused rostered days off.||Under preservation age||Up to the cap||32%||The lower of ETP cap and whole of income Cap|
|Preservation age or over||Up to the cap||17%|
|Above the cap||47%|
|Death benefit ETP taxable component paid to non-dependants||All ages||Up to the cap||32%||ETP cap|
|Above the cap||47%|
|Death benefit ETP taxable component paid to dependants||All ages||Up to the cap||nil||ETP cap|
|Above the cap||47%|
|Death benefit ETP paid to a trustee of a deceased estate||nil|
- An ETP may comprise of a tax-free component and a taxable component. These withholding rates only apply to the taxable components.
- the rates above include medicare levy (2%). Foreign residents taxed in Australia can exclude the levy.
- the rates above assume a valid TFN is provided (effective for 12 months); otherwise withholding rate is 47% (residents) or 45% (non-residents)
- ETP amounts taxed in another country under a tax treaty do not require withholding
See source data and further info Schedule 11
‘Excluded’ ETP amounts under the indexed concessional cap
Employment termination payments are concessionally taxed when the amounts are below the concessional caps. In calculating whether a cap has been breached, all of the payments in respect of a particular termination are counted (i.e. regardless of which year received).
The Indexed Cap is higher than the whole of income cap which has a non-indexed value of $180,000. To be measured against the Indexed Cap the ETP amount must be an ‘Excluded ETP’. Non-excluded ETP payments are measured against the non-indexed $180,000 cap.
A ‘excluded ETP’ is
- Genuine redundancy and early retirement scheme payments (the excess over the tax-free amounts)
- Invalidity payments (the excess over the tax-free amounts)
- Compensation received due to a genuine employment-related dispute relating to personal injury, unfair dismissal, harassment, discrimination, or any other matter prescribed by the regulations (s 82-10(6)).
Tax rates on taxable ETP payments
Amounts over the cap are taxed at the highest marginal tax rate plus medicare. For amounts up to the cap the tax is limited to 30% plus medicare for employees below preservation age, or 15% for those at or above preservation age at 30 June. The maximum tax rate is applied by way of compensating tax offset.
Death benefit amounts under the cap paid to a dependent are tax free; For death benefit amounts under the cap paid to a non-dependent the tax is limited to 30% plus Medicare.
|ETP Indexed Concessional Caps|
The “Whole of Income Cap” $180,000 non-indexed
From 1 July 2012 the ETP tax offset is limited, based on income
The cap on taxation of ETPs is achieved by crediting an offset amount (rebate) calculated in your tax assessment to ensure that the specified maximum tax rate is preserved.
From 1 July 2012, the ETP offset is limited so that only that part of an affected ETP (such as a golden handshake) that is under $180,000 will receive the ETP tax offset. (The $180,000 threshold is not indexed).
The ETP tax offset ensures that the tax on ETPs up to the ETP cap is limited to
- 15% for those at or over preservation age, and
- 30% for those under preservation age
See further: Working out the whole-of-income cap amount
What Is An ETP?
A lump sum payment made in consequence of a person’s termination of employment (including the death of that person) is referred to an Employment Termination Payment (ETP).
(Under rules which applied up to 30 June 2007, these payments were known as “Eligible Termination Payments”.)
What is included as an ETP
The definition of ETP includes amounts paid in lieu of notice or rostered days off, golden handshakes, invalidity payments (not personal injury) and certain death benefits payments.
An ETP also includes redundancy and early retirement scheme payments in excess of the tax-free components.
ETP 12 month rule
Generally to qualify as an ETP requires payment within 12 months, except for
- genuine redundancy or early retirement scheme payments,
- payments resulting from prior legal or insolvency processes
- or (upon request) if the Tax Office determines it is reasonable. (SPR 2017/D3)
If a payment falls outside the 12 month requirements, tax at normal rates applies to the payments.
What is excluded as an ETP
There are certain kinds of payment which are excluded from being an ETP by definition. The following are generally not ETPs:
- superannuation and pension payments
- unused annual or long service leave
- the tax free part of genuine redundancy or early retirement scheme payments
- foreign termination payments
- CGT retirement exemption amounts
- certain other capital payments including loans, dividends, personal injury and restraint of trade payments and assessable employee share scheme amounts (Sec 82-135 ITAA 1997)
These exclusions are essentially payments which are caught or dealt with under other areas of the tax law.
Special Rules to 30 June 2012: Transitional Termination Payments (“TTPs”)
Applicable until 30 June 2012, certain termination payments made between 1 July 2007 and 30 June 2012 were able to be rolled over into a super fund or used to buy an annuity.
For further information see:
ASIC Information on employee entitlements, what to do if there is a dispute
This page was last modified 2017-11-17