Employment termination payments

An employment termination payment (ETP) is a lump sum payment an employer makes to employees when their employment is terminated.

Depending on the age of the employee, and the length of their employment, the amount of an ETP may be taxed at a different rate. An ETP may encompass a tax-free portion, a concessionally taxed portion and a taxed portion.

To be eligible for concessions and to qualify for a lower rate of tax, employers must make an ETP to an employee within 12 months of their termination. Otherwise, the entire amount will be included in the employee’s assessable income and taxed at marginal rates.

An ETP may include:

• compensation for loss of job

• payment instead of notice

• a gratuity or “golden handshake”

• payments for redundancy or under an early retirement scheme

• compensation for wrongful dismissal

• unused sick leave

• unused rostered days off

An ETP does not include:

• payments for unused annual leave, long service leave or leave loading

• salary, wages, allowances, bonuses and incentives the employer owes the employee for work done or leave already taken

• payment for a restraint of trade

• compensation for personal injury

• employee share scheme payments

• foreign termination payments

• an advance or loan

Categorised in: Firm journal

This post was written by admin