Contents
- What is an ETP?
- Payments that are ETPs
- Tax treatment of ETPs
- ETP caps
- Multiple payments for same termination
- Death benefit ETPs
- Calculating the withholding amount
- Withholding rates for ETPs
- Delayed termination payments
- Preservation age
- ETP reporting
What is an etp?
What is an ETP?
An ETP is a lump sum payment made:
- to an employee when their employment is terminated (Life benefit ETP); or
- to an employee’s estate because their employment has been terminated due to death (Death benefit ETP)
ETPs include lump sum payments paid upon resignation, retirement or death. A payment from a super fund is not an ETP.
A payment must generally be made within 12 months of termination to qualify as an ETP. A payment made outside of 12 months is a delayed termination payment, unless we have given approval for the payment to be treated as an ETP.
Payments that are ETPs
| Payments included in ETPs | Payments not included in ETPs |
| A gratuity or golden handshake | Accrued leave payments for unused annual leave and long service leave |
| Genuine redundancy or early retirement scheme payments above the tax-free limit | Genuine redundancy or early retirement scheme payments up to the tax-free limit |
| Severance pay | Salary, wages, allowances, bonuses and incentives owing to the employee for work done or leave already taken |
| Non-genuine redundancy payments | Super benefits (for example, a lump sum or income stream from a super fund) |
| Payments in lieu of notice of termination | Foreign termination payments |
| Unused rostered days off (RDOs) | Certain payments for restraint of trade |
| Unused sick leave | Certain payments for personal injury if the employee is compensated for their inability to be employed |
| Compensation for loss of job | Employee share scheme payments |
| Compensation for wrongful dismissal, as long as it is paid within 12 months of the actual termination of employment | An advance or loan |
| Payments for loss of future super payments | na |
| Payments arising from an employee’s termination because of ill health (invalidity), other than compensation for personal injury | na |
| Lump sum payments paid on the death of an employee | na |
Tax treatment of ETPs
ETPs can have two different components:
- a tax free component
- a taxable component
Tax is only withheld from the taxable component.
Depending on the type of ETP, the concessional tax treatment may be limited to the smaller of:
- the ETP cap
- the whole-of-income cap
The top rate of tax applies to amounts paid in excess of these caps.
The ETP cap is $235,000 for the 2023-24 income year. This amount is indexed annually.
The whole-of-income cap amount for the 2023-24 income year is $180,000. This amount is not indexed. This cap is reduced by any other taxable income payments your employee receives in the income year – for example, salary or wages you have paid to your employee.
In some cases, you may need to include an ETP in the taxable payments when working out the whole-of-income cap.
The ETP payment summary has an ETP code that you use to describe the type of ETP and which cap has been applied to it.
ETP caps
The following table lists the types of ETPs that are subject to withholding and the applicable cap for each type of payment.
For payments in column 2, both caps are considered, and the smaller cap applies. Withholding will be required to be made at the top rate of tax on the amount over the smaller of the two caps.
| ETP cap only applies to: | Smaller of the ETP cap or whole-of-income cap applies to: |
| a payment made under an early retirement scheme that exceeds the tax-free limit (see Note 1) – only the amount in excess of the limit is an ETP | a ‘golden handshake’ whether paid under:
|
| a genuine redundancy payment that exceeds the tax-free base limit and for each complete year of service limit (see Note 1) – only the amount in excess of the limit is an ETP | a non-genuine redundancy payment |
| a payment made because of the employee’s permanent disability | severance pay |
| compensation payment for personal injury | a gratuity |
| compensation for unfair dismissal | a payment in lieu of notice |
| compensation for harassment | a payment for unused sick leave |
| compensation for discrimination | a payment for unused rostered days off |
| lump sum payments paid on the death of an employee | an ETP not covered in column 1 |
Note: The tax free base limit for the 2023–24 income year is $11,985 plus $5,994 for each completed year of service.
Steps to work out smallest cap
Follow these steps to work out the smaller of the ETP cap and whole-of-income cap:
- Add up all taxable payments you made to your employee (excluding the ETP).
- Subtract the step 1 result amount from $180,000.
- The result from step 2 is the calculated whole-of-income cap.
- Compare the calculated whole-of-income cap from step 3 and the ETP cap amount of $235,000 for 2023–24 (or the balance of ETP cap if a payment component has already applied to the ETP cap where there have been multiple payments for the same termination).
- If both caps are equal, use the whole-of-income cap. The smaller of the two caps at step 4 is the cap to apply to the ETP taxable component.
Multiple payments for same termination
For various reasons, ETPs may be made in more than one instalment. Payments made after the initial payment subject to the ETP cap, will attract a lower ETP cap. This is because the cap amount is reduced by the amount of all previous payments for the same termination.
Lump sum payments that are not ETPs may also be subject to PAYG withholding. Use the applicable tax table to work out the amount to be withheld from these payments.
Do not allow for any tax offsets or Medicare levy adjustments.
Do not withhold any amount for study and training support loans.
Death benefit ETPs
A death benefit termination payment is received by a person after another person’s death, in consequence of termination of the other person’s employment. The amount to withhold depends on a number of factors including whether the payment is made:
- directly to a dependant of the deceased
- directly to a non-dependant of the deceased
- to the trustee of the deceased estate
Use the table below to work out how much to withhold.
Calculating the withholding amount
An ETP can be made up of a tax-free component and taxable component. You must withhold an amount from the taxable component, including death benefit ETPs.
Do not withhold from the tax-free component of the ETP.
If your employee who is receiving an ETP has given you their tax file number (TFN) on a Tax file number declaration, use Table 1 to work out how much to withhold.
A Tax file number declaration remains effective for 12 months after you make the last payment to them.
If the payment is to be made to a foreign resident, you will need to check if there is a tax treaty with their country of residence. The full list of our tax treaties is maintained by the Australian Treasury. If the ETP is assessable only in the other country because of the treaty, then no withholding is required.
If a foreign resident’s ETP is assessable in Australia, you are required to withhold from the payment. Adjust the rates set out in Table 1 to exclude the Medicare levy of 2%.
When a TFN has not been provided
You must withhold 47% from the taxable component of an ETP you make to a resident employee and 45% from a foreign resident employee who has not given you their TFN.
Withholding rates for ETPs
| Income component derived by your employee in the income year | Age of person at the end of the income year that the payment is received | Component subject to PAYG withholding | Rate of withholding | Cap to apply |
| Life benefit ETP – taxable component Payment is because of:
| Under preservation age | Up to the ETP cap amount | 32% | ETP cap |
| Preservation age or over | Up to the ETP cap amount | 17% | ETP cap | |
| All ages | Amount above the ETP cap amount | 47% | ETP cap |
| Income component derived by your employee in the income year | Age of person at the end of the income year that the payment is received | Component subject to PAYG withholding | Rate of withholding | Cap to apply |
| Life benefit ETP – taxable component Payment is:
| Under preservation age | Up to the relevant cap amount | 32% | Smallest of ETP cap and whole-of-income cap |
| Preservation age or over | Up to the relevant cap amount | 17% | Smallest of ETP cap and whole-of-income cap | |
| All ages | Amount above the relevant cap amount | 47% | Smallest of ETP cap and whole-of-income cap |
| Income component derived by your employee in the income year | Age of person at the end of the income year that the payment is received | Component subject to PAYG withholding | Rate of withholding | Cap to apply |
| Death benefit ETP paid to non-dependants – taxable component | All ages | Up to the ETP cap amount | 32% | ETP cap |
| Amount above the ETP cap amount | 47% | ETP cap |
| Income component derived by your employee in the income year | Age of person at the end of the income year that the payment is received | Component subject to PAYG withholding | Rate of withholding | Cap to apply |
| Death benefit ETP paid to non-dependants – taxable component | All ages | Up to the ETP cap amount | Nil | ETP cap |
| Amount above the ETP cap amount | 47% | ETP cap | ||
| Death benefit ETP paid to a trustee of a deceased estate | – | – | Nil | – |
Additional information
A death benefit dependant for taxation purposes includes:
- spouse of the deceased
- child of the deceased under 18 years old
- a person who had an interdependency relationship with the deceased
- a person who was a dependant of the deceased just before the latter died
A spouse of the deceased includes another person (of any sex) who:
- was in a relationship with the deceased as registered under a prescribed state or territory law
- lived with the deceased on a genuine domestic basis in a relationship as a couple, although not legally married
A child of the deceased includes:
- an adopted child, stepchild or ex-nuptial child
- a child of the deceased’s spouse
- a child of the deceased within the meaning of the Family Law Act 1975 (for example, a child who is considered to be a child of a person under a state or territory court order giving effect to a surrogacy agreement)
An interdependency relationship includes:
- a close personal relationship between two people who live together, where one or both provides for the financial and domestic support and personal care of the other
- a close personal relationship between two people who live together but do not satisfy one or more of the requirements mentioned in the previous dot point due to either or both of them suffering from a physical, intellectual or psychiatric disability
If an ETP will be paid to the trustee of a deceased estate, no amount should be withheld.
Delayed termination payments
Generally, a payment must be made within 12 months of termination to qualify as an ETP. A payment made after 12 months is a delayed termination payment, unless we have given approval for the payment to be treated as an ETP.
A delayed termination payment is not treated as an ETP. It must be reported in ‘Gross payments’ in Single Touch Payroll (STP).
When a TFN is provided
If your employee has given you their TFN, withhold an amount equal to 32% from the payment. Withholding amounts are rounded to the nearest dollar once calculated. Results ending in 50 cents are rounded to the next higher dollar.
When a TFN has not been provided
You must withhold 47% from the payment you make to a resident employee and 45% from a foreign resident employee (ignoring any cents) who has not given you their TFN.
Preservation age
The withholding amount varies depending on whether the employee has reached their preservation age by the end of the income year in which the payment is made.
Preservation age is determined using your employee’s date of birth. For example, if your employee was born on 1 October 1962, they reached their preservation age of 58 on 1 October 2020. The table below will help with this.
| Date of birth | Preservation age |
| Before 1/7/1960 | 55 |
| 1/7/1960–30/6/1961 | 56 |
| 1/7/1961–30/6/1962 | 57 |
| 1/7/1962–30/6/1963 | 58 |
| 1/7/1963–30/6/1964 | 59 |
| After 30/6/1964 | 60 |
ETP reporting
You must report an ETP in Single Touch Payroll (STP).
An ETP code is used to describe the type of payment, and determines which cap, ETP cap or whole-of-income cap is applied. The tables below shows the type of ETPs and which code applies.
Life benefit ETP
| Code | Description |
| R | ETP because of:
|
| O | Other ETP not described by R, for example, golden handshake, gratuity, payment in lieu of notice, payment for unused sick leave, payment for unused rostered days off. |
Multiple payments for the same termination
| Code | Description |
| S | This is a code R payment. You made one of the following payments to your employee in a previous income year for the same termination:
|
| P | This is a code O payment and you made one of the following payments to your employee in a previous income year for the same termination:
|
Death benefit ETP
| Code | Description |
| D | Death benefit ETP paid to a dependant of the deceased. |
| B | Death benefit ETP paid to a non-dependant of the deceased. You made a termination payment to the non-dependant in a previous income year for the same termination. |
| N | Death benefit ETP paid to a non-dependant of the deceased. |
| T | Death benefit ETP paid to a trustee of the deceased estate. |
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.