How is an employment termination payment taxed in Australia?
Employment termination payments (ETPs) in Australia are generally taxed at concessional rates up to a certain cap, with any excess taxed at your marginal tax rate. They can include payments for unused sick leave, genuine redundancy, or early retirement.
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How it works in practice
What is an Employment Termination Payment (ETP)?
An Employment Termination Payment (ETP) is a lump sum payment made to an employee when their employment is terminated. It typically includes payments for unused sick leave, payments for unfair dismissal (when not genuine redundancy), or payments for early retirement schemes. However, it does not include unused annual leave or long service leave, which are taxed differently.
How ETPs are Taxed
ETPs are subject to special tax rules. Generally, they are taxed at a lower, concessional tax rate up to a certain cap amount. This ETP cap is indexed annually. Any part of the ETP that exceeds this cap is then taxed at your top marginal tax rate, excluding the Medicare levy. Your employer should provide you with an ETP statement outlining the components and the tax withheld.
ETP Cap and Whole-of-Income Cap
It's important to distinguish between the ETP cap and the whole-of-income cap. The ETP cap applies to the amount of the payment that receives concessional tax treatment. The whole-of-income cap is a separate limit that applies to the entire ETP, beyond which it's taxed at your marginal rate. Understanding these limits is crucial for accurate tax reporting.
Important exceptions
Not all payments received upon termination are ETPs. Unused annual leave and long service leave are generally taxed at your marginal rate, not as an ETP. Additionally, if the payment is for a non-genuine redundancy, it may not qualify for the concessional ETP tax rates. Also, the concessional tax treatment only applies up to a certain cap amount (the ETP cap amount), with any amount above this cap being taxed at your marginal income tax rate. Payments from some superannuation schemes upon termination may also be taxed under different rules.
What you should do now
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Understand the components of your termination payment, as some parts are taxed differently than others.
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Request an ETP statement from your employer, which details the payment type and tax withheld.
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Review your ETP statement to ensure the correct tax has been withheld based on ATO guidelines.
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Declare your ETP correctly in your annual income tax return, using the information provided in your statement.
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Seek professional tax advice if your ETP is complex or if you are unsure about your obligations and entitlements.
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