Whether you’re transitioning to a new job, entering retirement, or facing redundancy, leaving an employer often comes with one big question: What happens to your final payment? Understanding how your Eligible Termination Payment (ETP) works can make a substantial difference to your finances. In this guide, we break down the essentials of ETPs so you know what to expect—and how to prepare—for this important financial event.
What Is an Eligible Termination Payment?
An Eligible Termination Payment (ETP) is a lump sum amount paid to an individual upon termination of employment. This could be due to resignation, retirement, redundancy, dismissal, or early termination of a contract. It includes components like unused sick leave, payment in lieu of notice, and certain types of severance pay.
These payments attract special tax treatment under Australian law, depending on the type of ETP received and the individual’s age and years of service.
Types of Payments Included in an ETP
Understanding what’s included—and what’s excluded—can help you take full advantage of any tax concessions that apply to your termination payout.
| Included in ETP | Excluded from ETP |
|---|---|
| Payment in lieu of notice | Superannuation benefits |
| Redundancy payments (over tax-free cap) | Accrued annual or long service leave |
| Unused sick leave | Compensation for personal injury |
| Golden handshake or ex gratia payments | Salary, wages, bonuses |
| Early retirement scheme payments | Employee share scheme payments |
Note: Only the taxable component of your ETP is taxed at concessional rates.
How Are ETPs Taxed?
ETPs can be taxed at concessional (lower) rates, depending on two factors:
- Recipient’s age
- Whether the payment is within the “ETP cap”
Below is a simplified table showing how taxation works:
| Age at Termination | ETP Cap | Tax rate (2023–24) |
|---|---|---|
| Under preservation age | $235,000 | 30% (plus Medicare levy) |
| At or above preservation age | $235,000 | 15% (plus Medicare levy) |
| Amounts over the cap | N/A | Marginal tax rate (up to 45% + ML) |
Preservation age varies depending on when you were born. For details, refer to the Australian Taxation Office’s official guidelines.
When Must ETPs Be Paid?
To qualify for preferential tax rates, ETPs must be received:
- Within 12 months of the termination date.
- As a lump sum, not in installments.
Failure to meet these conditions could lead to the ETP being taxed as ordinary income, potentially resulting in much higher taxes.
Strategic Planning for Your ETP
Here’s how to make the most of your ETP:
- Seek financial advice: Consulting a tax or financial advisor can uncover legal strategies to reduce your tax burden.
- Understand the caps: Only payments under the ETP cap enjoy concessional tax treatment.
- Consider your total income: The amount of ETP you receive may bump you into a higher tax bracket.
Conclusion
An Eligible Termination Payment can be a financial lifesaver—or an unexpected tax trap—depending on how it’s managed. By understanding what constitutes an ETP, how it’s taxed, and the best way to receive it, you can ensure your financial transition is as smooth as possible.
Don’t leave your future payout to chance—take control today by learning the rules that govern your exit package.
Sufiyan, a passionate IT professional and finance enthusiast dedicated to simplifying financial clarity for every Australian. With years of experience in both tech and personal finance, Sufiyan oversees all content to ensure accuracy, usability, and relevance.