Employment Termination Payments (ETP): What You Need to Know

Employment Termination Payments (ETP): What You Need to Know

When you leave your job or change employment, you may receive one or more lump sum payments. These payments are taxed differently from your regular salary income. Understanding the types of payments you may receive, how they are taxed, and what amounts need to be reported on your tax return is essential for ensuring tax compliance.

What is an Employment Termination Payment (ETP)?

An Employment Termination Payment (ETP) is a specific type of lump sum payment you receive from your employer when you leave your job. Your ETP may include various different amounts, depending on your circumstances for leaving and the terms of your employment contract.

Types of ETP payments:

• Unused leave payments — Payment for unused portions of sick leave, on-call days, or annual leave
• Payments in lieu of notice — Amount paid to you by your employer instead of providing a notice period
• Redundancy payments — Lump sum payment due to redundancy or restructuring
• Disability payments — Compensation received by employees due to permanent disability
• Unfair dismissal or unlawful termination compensation — Compensation related to unfair dismissal or breach of employment law
• Genuine redundancy payments — Redundancy or early retirement scheme payments exceeding tax-concessional limits
• Payments following employee death — Certain amounts paid to the estate or beneficiaries after employee death
• Property transfer value — Market value of property transferred due to termination (less any consideration paid)

Note that ETPs do not include tax-free portions of unused annual or long service leave payments, genuine redundancy payments or early retirement scheme payments, superannuation benefits, or foreign termination payments.

You will receive a payment summary (or similar annual statement) showing the amounts you received and any tax withheld. Use this information to complete your income tax return.

How ETPs Are Taxed

The tax treatment of your ETP depends on how soon after leaving you receive the payment and the specific composition of the payment. Generally, if you receive your ETP within 12 months of leaving, you may be eligible for special tax concessions.

ETPs received within 12 months may receive up to three different types of tax treatment:

• Tax-free — Applies to portions for disability or work completed before 1 July 1983 (0% tax rate)
• Concessional rate — Applies to payment amounts up to specified thresholds (taxed below your marginal rate)
• Top marginal rate — Applies to amounts exceeding relevant thresholds (45% plus Medicare Levy of 2% = 47%)

For ETPs received more than 12 months after leaving, the tax treatment differs, which may affect the total tax you pay on these payments. Remember that you cannot transfer ETP amounts into your superannuation account.

Unused Entitlements and Tax Treatment

The tax you pay on unused leave and termination payments may be quite different from the tax you pay on regular salary income. The tax payable depends on why you left and any unused entitlements you may have accumulated, such as long service leave or sick leave.

If you receive any lump sum payment to settle unused annual leave or long service leave, you may need to pay tax at a lower rate than on other income. These payments are typically shown on your income statement or payment summary as "Total A" or "Total B". Understanding the differences between these categories will help you report these amounts correctly.

Employment Termination Payments (ETP): Quick Reference Sheet

What is an ETP?

A lump sum payment received when you leave your job, taxed differently from regular salary income.

Common ETP Types

Tax Treatment: ETPs Received Within 12 Months

Key Points to Remember

• You cannot transfer ETP amounts into superannuation
• ETPs received more than 12 months after leaving have different tax treatment
• Check your payment summary for "Total A" or "Total B" classifications
• Report all ETP amounts on your income tax return
• Keep records of your payment summary and employment contract

What to Do Next

1. Obtain your payment summary from your employer
2. Identify which ETP categories apply to your payments
3. Note the date you received each payment (within or beyond 12 months of leaving)
4. Report all amounts on your tax return in the correct income categories
5. Consider seeking professional advice if your ETP is complex or substantial