Employment Termination Payments

ETP’s are added to the taxpayer’s other taxable income.

Only that part of an ETP, which takes a taxpayer’s total annual taxable income (including the ETP) to no more than the applicable ETP cap, receives the ETP tax offset.

A Whole of Income Cap rather than an ETP Cap applies in some cases

Max Tax Rate up to the Cap is 17% if preservation age is reached or 32% if not reached

Any amount of the ETP that causes taxable income to exceed the ETP cap, is taxed at the top marginal tax rate of 47%.

Refer to the links below for more details

Financial year	ETP Cap	Whole of Income Cap
2021/2022	$225,000	$180,000
2020/2021	$215,000	$180,000
2019/2020	$210,000	$180,000
2018/2019	$205,000	$180,000
2017/2018	$200,000	$180,000
2016/2017	$195,000
2015/2016	$195,000
2014/2015	$185,000
2013/2014	$180,000
2012/2013	$175,000
2011/2012	$165,000
2010/2011	$160,000
2009/2010	$150,000
2008/2009	$145,000
2007/2008	$140,000

NB:

The taxable components of all life benefit employment termination payments received in an income year are counted towards this cap.

Also counted towards the cap are the taxable components of any life benefit employment termination payments which have been received in an earlier income year for the same employment termination.

The death benefit cap is independent of the life benefit termination payment (i.e. a recipient can get both).

Post 1/7/2007 Rules - Employment Termination Payments

 

Traditional employer Eligible Termination Payments no longer exist after 30 June 2007.

 

Lump sums paid to an employee in consequence of termination of employment from 1 July 2007 are known as ‘Employment Termination Payments’.

 

There are only 2 components for tax purposes.

 

    > Tax-free component – includes Invalidity & pre July 83 component.

 

    > Taxable component – the rest.

 

Significantly, Employment Termination Payments:

 

> must be paid out within 12 months of termination.

 

> can no longer be rolled over to superannuation.

 

> no longer have a tax-free component except on death.

 

 

Employment Termination Payments can include:

 

> amounts in respect of unused rostered days off;

 

> amounts in lieu of notice;

 

> a gratuity or ‘golden handshake’;

 

> an employee’s invalidity (permanent disability, other than compensation for personal injury);

 

> redundancy and approved early retirement amounts in excess of the tax-free component; and

 

> certain payments after the death of an employee.

 

 

Employment Termination Payments do not include:

 

> payments in respect of unused annual leave or unused long service leave;

 

> the tax-free portion of approved redundancy and early retirement payments. 

 

The tax treatment of such amounts is unchanged under the reforms.

 

 

The taxation of an Employer Termination Payment will depend whether it is:

 

> A Death benefit termination payment; or

 

> A Life benefit termination payment

 

 

The tax treatment of the Taxable Component can be summarised as follows:

 

Employees Age	Within Employment Termination Payment Cap (1)	Excess above Employment Termination Payment Cap
Under preservation age# on the last day of the income year in which the payment is made*	Maximum Rate 30%	Recipient’s top marginal tax rate plus Medicare levy
Preservation age# or over on the last day of the income year in which the payment is made*	Maximum Rate 15%	Recipient’s top marginal tax rate plus Medicare levy

 

# Preservation age is the age at which retirees can access their superannuation benefits.  This depends on their date of birth.  Refer to the link below for more information on ‘Preservation Ages’.

 

* Included in Taxable Income for Medicare Levy purposes.

 

(1) The Employment Termination Payment Cap will be indexed to AWOTE annually.

 

The tax treatment of the Taxable Component can be summarised as follows:

 

Recipient	Within Employment Termination Payment Cap	Excess above Employment Termination Payment Cap
Dependant	Tax-free	Recipient’s top marginal tax rate plus Medicare levy
Non-dependant	Maximum rate of 30%	Recipient’s top marginal tax rate plus Medicare levy

 

 

The transitional arrangements apply to you if:

 

> a payment on termination is specified in an existing employment contract as at 9 May 2006; and

 

> the payment is made prior to 1 July 2012.

 

Refer to the links below for more details.

 

 

Transitional termination payments may be:

 

> contributed (in full or in part) to a superfund; or

 

> used (in full or in part) to buy a super annuity before 1 July 2012.

 

If this is done it is known as a directed termination payment.

 

 

Transitional ETP Caps	Lower Cap (1)	Upper Cap (2)
2011/2012	$165,000	$1,000,000
2010/2011	$160,000	$1,000,000
2009/2010	$150,000	$1,000,000
2008/2009	$145,000	$1,000,000
2007/2008	$140,000	$1,000,000

 

 

(1) The Employment Termination Payment Cap will be indexed to AWOTE annually.

 

(2) The $1 million will not be indexed.

 

 

The tax treatment of life benefit termination payments that are not rolled over can be summarised as follows:

 

Age	Transitional ETP Lower Cap	The Rest up to $1 million	Excess Above $1 million (2)
Under preservation age# on the last day of the income year in which the payment is made*	Maximum Rate 30%	Maximum Rate 30%	45%
Preservation age# or over on the last day of the income year in which the payment is made*	Maximum Rate 15%	Maximum Rate 30%	45%

 

# Preservation age is the age at which retirees can access their superannuation benefits.  This depends on their date of birth.  Refer to the link below for more information on ‘Preservation Ages’.

 

* Included in Taxable Income for Medicare Levy purposes.

 

 

 

Age	Max. Tax Rate Taxed Element	Max. Tax Rate Untaxed Element
Age under 55*	20%	30%
Age 55 or over:*
-  Less than ETP low rate threshold below	Nil	15%
-  More than ETP low rate threshold below	15%	30%

 

*Included in Taxable Income for Medicare Levy purposes except for the taxed element of the ETP low rate threshold.

 

 

Post 30/6/83 component – age 55 and over

 

Year	Low rate ETP threshold
2006/07	$135,590
2005/06	$129,751
2004/05	$123,808
2003/04	$117,576
2002/03	$112,405
2001/02	$105,843
2000/01	$101,188
1999/00	$97,109
1998/99	$94,189
1997/98	$90,916
1996/97	$86,917
1995/96	$83,574
1994/95	$79,975

 

 

Component	Taxation Rate
CGT exempt	Tax-free
Post-June 1994 Invalidity	Tax-free
Spouse contribution	Tax-free
Undeducted contributions	Tax-free
Concessional	5% included in assessable income and taxed at marginal rate + medicare levy*
Pre-July 1983	5% included in assessable income and taxed at marginal rate + medicare levy*
Death benefit ETP paid to non-dependant*	Taxed element 15% (max)	Untaxed element 30% (max)
Death benefit ETP paid to dependant	Tax-free (within deceased’s pension RBL)
Excessive benefits:*
- Portion that represents post 30/6/83 taxed element		38%
- Remainder of the excess benefit		47%

 

*Included in Taxable Income for Medicare Levy purposes.