When employment comes to an end, employees may receive different types of payments depending on the circumstances of their departure. While redundancy is one common reason, many terminations occur due to resignation, dismissal, retirement, or contract completion. In these cases, the payments made to employees are known as Employment Termination Payments (ETPs), and they are taxed differently depending on the reason for leaving and the employee’s age.
Let’s explore what ETPs are, when they apply, and how they are taxed for non-redundancy terminations.
What is an Employment Termination Payment (ETP)?
An Employment Termination Payment (ETP) is a lump sum payment made to an employee when their job ends. It is generally paid for things like:
- Payment in lieu of notice
- Gratuities or “golden handshakes”
- Compensation for loss of employment
- Certain unused leave entitlements (in some cases)
However, ETPs do not include:
- Unused annual leave or long service leave (these are taxed separately)
- Genuine redundancy payments
- Superannuation benefits
- Salary, wages, or bonuses earned before termination
When is an ETP Paid?
An ETP is usually made when an employee’s job ends due to:
- Resignation
- Dismissal or termination for cause
- Retirement
- End of a fixed-term contract
- Death (paid to the employee’s estate or beneficiary)
Tax Treatment of ETPs for Non-Redundancy Terminations
The tax treatment of an ETP depends on:
- The type of payment,
- The recipient’s age, and
- The ETP cap limits set by the ATO for the financial year.
For 2024–25, the ETP cap is $245,000.
ETPs are taxed at concessional rates up to this cap, depending on the employee’s preservation age (the age at which they can access superannuation).
| Age / Status | Tax Rate (Up to Cap) | Tax Rate (Above Cap) |
| Below preservation age | 30% (plus Medicare levy) | 45% (plus Medicare levy) |
| At or above preservation age | 15% (plus Medicare levy) | 45% (plus Medicare levy) |
If the payment exceeds the cap, the excess is taxed at the top marginal rate.
Example Scenario
Emma, aged 52, resigns after 10 years of service.
She receives:
- $20,000 in unused annual leave (not part of ETP)
- $60,000 as a goodwill “thank you” payment (ETP)
Because Emma is below preservation age, her $60,000 ETP will be taxed at 30% plus Medicare levy, since it’s within the ETP cap.
Key Points to Remember
- ETPs must generally be paid within 12 months of termination to qualify for concessional tax treatment.
- Payments over the cap amount are taxed at the top marginal rate.
- Different termination types (e.g. redundancy, dismissal, retirement) affect the eligibility and tax rate.
- Employers must provide an ETP payment summary and report it to the ATO.
Why Getting Advice Matters
ETPs can be complex — especially when mixed with other payments like leave entitlements or superannuation. Mistakes in classification or timing can lead to unnecessary tax liabilities for both employers and employees.
At Certum Advisory, we help individuals and businesses understand, calculate, and report Employment Termination Payments correctly — ensuring compliance and maximising tax efficiency.
Need professional help managing employment terminations or understanding your ETP tax obligations?
Contact Certum Advisory today for personalised guidance.
