What is an Employment Termination Payment (ETP)?
An Employment Termination Payment (ETP), sometimes known as a redundancy payment is a lump sum amount paid to an employee, after redundancy.
There are a few different types of redundancy payments and each one can have a different effect on your tax return at tax time.
For tax purposes an Employment Termination Payment may include:
- Severance pay (usually a number of weeks’ pay based on the duration of your employment).
- A “golden handshake” or one-off goodbye payment.
- Payment in lieu of notice.
Other payments you may receive, not considered part of your redundancy payment include:
- Back-pay or money owed to you for work you’ve done
- Payouts of leave loading or accrued annual leave
- Payments made instead of superannuation benefits
- Payouts for unused long service leave
A couple more details about redundancy payments:
- The ATO says the payment must generally be received within 12 months of stopping work, or else it is not treated as a redundancy payment. (There are some exceptions to that and a tax agent can help sort them out).
- You can’t just drop your ETP into a superannuation account.
‘Genuine’ Redundancy
It needs to be determined whether the ETP is a genuine redundancy “for tax purposes”. This establishes whether it is tax free (up to a certain limit) or taxed at a special rate. The ETP must be related to a situation where an employee’s position is genuinely made redundant.
These points help to indicate a genuine redundancy:
- You were dismissed from employment.
- The dismissal is genuinely caused by the position becoming redundant.
- The ETP must be made because of the redundancy.
- All ties are severed between the employer and employee (i.e. the employer cannot terminate your job and re-hire you at a while later).
- The redundant job is not re-filled by another person to perform the exact same role.
Your ETP and Tax
If you’ve received a genuine redundancy payment, part or all of it may be tax free. As below:
| Financial Year | Tax free amount | Tax free amount for each year of service |
|---|---|---|
| 2021–22 | $11,341 | $5,672 |
| 2020–21 | $10,989 | $5,496 |
So, if your total genuine redundancy payment is less than this, you won’t pay any tax on the payment at all!
If you are:
- below the preservation age, you pay tax at 30% (+Medicare Levy) on any excess amount above the tax free component, up to $210,000.
- above the preservation age, you pay tax at 15% (+Medicare Levy) on any excess amount above the tax free component, up to $210,000
Then, at ANY age, you pay tax at the rate of 45% (+Medicare Levy) for any remaining amount above $210,000.
Other Lump Sum payments
Lump sum payments and voluntary separation
If you choose to leave your current employer after finding a new position or to take a break from the work force, then you may also receive a lump sum payment. This termination will not qualify as a ‘Genuine’ Redundancy (it doesn’t meet the criteria above), so you will pay tax on the full amount of the payment.
Retirement and Lump sum payments
Tax obligations for lump sum payments paid to retirees often depend on existing employer agreements. Some employers may offer an early retirement scheme to encourage groups of employees to retire early. If you’re part of an Employee Share Scheme (ESS), consider whether ‘good leaver’ conditions apply to you to avoid forfeiture of assets. Ultimately it is best to seek advice from your employer or tax agent when planning to retire.
How to enter an Employment Termination Payment on your tax return
After redundancy your employer must issue a summary for your ETP. This summary, issued within 14 days of your final work day and includes details of your redundancy payment.
Come tax time, the Etax tax return makes it very easy to include the figures from your ETP summary. Select the ‘Termination Payment’ option in the ‘My Income’ section. You simply enter the figures in your summary into the corresponding fields of the tax return. You may not receive a copy of your summary from your employer directly. Don’t worry about this, you don’t need to go to MyGov to get it either. Just like your normal income statements, Etax can access your redundancy payment information from the ATO for you.
If you need any help with an Employment Termination Payment on your tax return, hop onto live chat or send your Etax Accountant a private message. Your accountant makes sure you know what to enter and where, or they can access the information and enter everything correctly for you for no extra cost.
Losing a job is often quite a traumatic experience and something a huge number of Australians face each year. Interestingly, being made redundant can actually be the best thing that could happen. To find out how, read our Redundancy tips from a careers expert article.
