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This guide outlines the tax and Unused annual leave and long service
leave payments ....................................... 8
social security implications of
payments made to employees Advice opportunities .............................. 9
on termination of employment
(including genuine redundancy)
and the advice opportunities. Employment termination
payments
Chris Chow, Technical Consultant
A payment is considered an employment
Introduction termination payment (ETP) when it is
made to:
Upon termination of an employee’s position,
an employee may receive several different ▪ an employee, in consequence of
the termination of their employment
payments including:
(a life benefit ETP), or
▪ amounts due to a genuine redundancy ▪ another person after an employee’s death,
or early retirement scheme in consequence of the termination of that
▪ those classified as employment employee’s job (a death benefit ETP), and
termination payments, and ▪ the payment is made within 12 months
▪ unused annual leave and long of the date of termination, and
service leave. ▪ it is not specifically excluded from being
an ETP.
It is necessary to identify the types of
payments being made. This is because ETPs usually enjoy concessional tax treatment
some payments are specifically excluded and the applicable rates of tax depend on the:
from the definition of employment termination
payment and are taxed separately. Other ▪ age of the recipient
▪ taxable income of the recipient, and
factors may also impact the tax implications
▪ the amount of the ETP.
for each type of payment.
This guide discusses those factors and
Note: There are different caps that limit the
also examines any available strategies
amount of a termination payment that is subject
to help manage the impact, including any to concessional tax treatment. Refer to the ETP
impact on social security entitlements. and whole-of-income caps in the ‘Taxation of life
benefit ETPs’ section below.
Note: Unless otherwise stated, all further
references to ‘genuine redundancy payments’ In order to understand the tax implications
in this article also refers to payments made of payments received, it is necessary to
under an early retirement scheme. determine whether the payment falls under
the definition of an ETP. Certain payments
are specifically excluded from being an ETP,
such as unused lump sum annual leave (AL)
and long service leave (LSL) payments, and
are subject to different rates of tax.
1
The following table, though not exhaustive, outlines different payments that may be received
on termination of employment and distinguishes types of payments that are treated as an ETP
for tax purposes, and those that are not.
Table 1: Which payments are ETPs?
1 ITAA97 s82-130(1)(b)
2 ITAA97 s82-130(4)
3 ATO guidance: ETP 2018/1 and ETP 2019/1
2
Genuine redundancy payments
A genuine redundancy payment is a payment received by an employee due to being dismissed
because their position no longer exists and is not being replaced 4. This usually results in a larger
termination package than if the client voluntarily resigned or retired. This additional amount is the
genuine redundancy payment that may be eligible for tax-free treatment.
For a payment to be treated as a genuine redundancy payment, the following conditions must
also be satisfied:
▪ the employee is dismissed before the earlier of the following:
- the day they reach their Age Pension age5, or
- an earlier mandatory age of retirement or before the end of a particular period of service6
▪ for non-arm’s length dismissals – the payment does not exceed amounts reasonably expected
as though it was at arm's length
▪ there was no arrangement in place to employ the employee after their retirement, and
▪ the payment must not be in lieu of superannuation benefits.
Note: ATO Taxation Ruling TR 2009/2 provides a detailed outline of the requirements for a payment
to qualify as a genuine redundancy payment and the interaction between the tax treatment of genuine
redundancy payments and other termination payments.
Tax-free amount = Base amount + (Service amount x Each completed year of service)
Where:
▪ Base amount = $11,341
▪ Service amount = $5,672
▪ Each completed year of service = Number of full years of completed service
(part years of service are not included)
Note: Both figures in the formula above are indexed each year in line with movements in AWOTE.
4 Termination due to voluntary resignation or retirement, or dismissal for not meeting employment standards do not qualify
as genuine redundancy.
5 ITAA97 s83-175, age 65 if dismissal occurred prior to 1 July 2019.
6 Any termination payments received upon completion of a fixed term contract will usually not qualify under the tax-free limit.
7 ITAA97 s83-180
8 ITAA97 s83-170
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If the tax-free amount is greater than or equal to the genuine redundancy payment, the entire
payment is non-assessable and non-exempt income (ie received tax-free by the employee). Where
the tax-free amount is less than the genuine redundancy payment, the tax-free amount is not taxed
but the amount in excess of the tax-free amount is taxed as an ETP (refer to ‘Table 2: Taxation of life
benefit termination payments’ for ETP tax rates).
Age limitation
An employee must be less than their Age Pension age 9 at the time of dismissal for a redundancy
payment to qualify as a genuine redundancy payment 10. Where dismissal occurs after Age
Pension age:
▪ the employee is not entitled to a tax-free amount of a genuine redundancy payment
▪ the entire payment is taxed as an ETP, and
▪ unused AL and LSL payments are subject to less favourable tax rates.
Advice tip
Where possible, clients being made redundant who are nearing their Age Pension age may want
to negotiate an earlier dismissal date with their employer to access the concessional tax treatment
for genuine redundancy payments. However, they should also consider the impacts of negotiating
an earlier termination, such as foregone salary and superannuation guarantee contributions.
In all cases, the tax-free component of an ETP is non-assessable and non-exempt income
(ie not included in assessable income for income tax purposes and not subject to tax).
9 Or another earlier mandatory retirement age. Age pension age is gradually increasing to 67.
10 For terminations that occurred prior to 1 July 2019, employees had to be under age 65 on the date of dismissal
for payments to qualify as a genuine redundancy payment.
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Taxation of life benefit ETPs
A life benefit termination payment is a lump sum ETP paid to an employee because of the termination
of their employment (excludes termination due to death of the employee). There are two categories of
life benefit termination payments, ‘excluded’ and ‘non-excluded’ payments, which impacts the amount
of an ETP subject to concessional tax treatment. Excluded payments are subject to the ETP cap only,
while non-excluded payments are subject to the ETP cap and the whole-of-income cap.
The following types of life benefit termination payments are excluded payments:11
▪ genuine redundancy payments above the tax-free amount (regardless of eligibility for
tax-free amount)
▪ payments for job loss due to invalidity, and
▪ compensation payments due to a genuine employment related dispute relating to personal
injury, harassment, discrimination or unfair dismissal.
Any other ETP that is not treated as an excluded payment are usually non-excluded payments
(eg gratuities or golden handshakes, payments in lieu of notice and severance pay).
Relevant cap Age at end of financial year Component Cap amounts Tax rate*
11 ITAA97 s82-10(6)
12 ITAA97 s82-10
13 Although the same figure, the ETP cap is separate from the low rate cap, which only applies to certain lump sum
super benefits. The ETP cap is an annual cap whereas the low rate cap is a lifetime cap.
14 Indexed annually to AWOTE, in $5,000 increments if the indexation amount is at least $5,000
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The taxable portion of an ETP is included in assessable income. However, ETPs within the cap
receive a tax offset ensuring the rate of income tax paid on the ETP does not exceed the tax
rates shown in Table 2. Where a termination payment includes a mixture of excluded and non-
excluded payments, excluded payments are applied against the ETP cap first.
This ensures that a person’s ETP cap is not exhausted on the non-excluded payments (which
may not get concessional tax treatment under the whole-of-income cap rules discussed below)
at the expense of excluded payments (which may receive concessional tax treatment).
Whole-of-income cap
In addition to the ETP cap, the taxable component of non-excluded payments is also subject to
a $180,000 whole-of-income cap (non-indexed). This limits the amount of non-excluded ETPs
that are eligible for the ETP tax offset.
The whole-of-income cap takes into account other taxable income earned by a client in the financial
year, such as employment income, investment income and lump sum unused AL and LSL payments.
The taxable component of a client’s non-excluded ETP being assessed against the whole-of-income
cap is then added last15 to an individual’s other taxable income. If this combined amount is equal to
or below the whole-of-income cap, it continues to be eligible for the ETP tax offset.
If part or all of the non-excluded ETP added to a client’s other taxable income exceeds the whole-
of-income cap in a financial year, the part that is in excess of the cap is taxed at the highest MTR.
This part is not eligible for the ETP tax offset, even if there is unused ETP cap remaining.
The whole-of-income cap rules do not apply to excluded payments, the tax-free component of an
ETP or the tax-free amount of a genuine redundancy payment.
Advice tip
An employee that finds new employment after termination and earns more taxable income in the
same financial year may pay more tax on the ETP from their previous job when they lodge their
tax return. This is due to the taxable income earned after termination further reducing the amount
of whole-of-income cap available for the ETP.
Note: refer to Appendix B – Taxable income for whole of income cap for a more comprehensive list of
what is included in taxable income for the whole of income cap purposes.
Where a client receives multiple ETPs in a financial year, a client’s taxable income also includes
the taxable component of ETPs received earlier in the income year, including amounts that are
excluded payments if subject to the ETP cap (eg ineligible for tax-free amount). This is because
these payments are included in taxable income and subject to tax, but the ETP tax offset ensures
the amount of tax paid is limited to the maximum rates of tax applicable in Table 2: Taxation of life
benefit termination payments.
15 Revised explanatory memorandum to Tax Laws Amendment (2012 Measures No. 3) Act 2012 (Cth), paragraph 5.11.
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Example 2: ETP comprising excluded payment only
Virgil (age 69) has worked for his employer for 5 years. In 2021/22, his company merges
with another and his position is no longer required. Virgil receives a redundancy and is paid
$130,000 (100% taxable component). This amount would not have been received if he had
voluntarily resigned or retired.
Although his payment does not qualify as a genuine redundancy payment as he is over
Age Pension age (and not eligible for a tax-free amount), it is still an excluded payment
as it would otherwise have qualified as a genuine redundancy payment.
Virgil has not received any ETPs this financial year, therefore his $130,000 redundancy
payment is taxed at a maximum of 17% as it is within the $225,000 ETP cap.
Example 3: ETP comprising non-excluded payment only
Henrique (62) retired from his job in April 2022. In the 2021/22 financial year,
Henrique received:
▪ taxable income from wages and investments of $110,000
▪ unused lump sum annual leave of $10,000, and
▪ an unused sick leave payment of $105,000 (100% taxable ETP).
As the payment relates to an entitlement from voluntary resignation (ie not a genuine
redundancy), the unused sick leave is a non-excluded payment and may be subject to
the whole-of-income cap.
To work out Henrique’s whole-of-income cap, $180,000 is reduced by Henrique’s other
taxable income and unused annual leave for the financial year, excluding the unused sick
leave ETP (ie $180,000 - $120,000). This leaves a whole-of-income cap balance of $60,000,
which is less than the non-excluded ETP amount, which is therefore subject to the whole-of-
income cap.
Henrique is eligible for the ETP tax offset on $60,000, paying a maximum of 17%
tax on this amount, and the remaining $45,000 is taxed at 47% (top MTR including
Medicare levy).
Example 4: ETP comprising ‘excluded’ and ‘non-excluded’ payments
Going back to the Example 2 with Virgil (age 69), let’s assume the same facts except on
top of the $130,000 excluded genuine redundancy payment, he also receives a $65,000
non-excluded termination payment (combined payment of $195,000). He also earned other
taxable income of $165,000 in the financial year.
As the ETP comprised excluded and non-excluded payments, the payments are taken to be
received in the following order:
▪ excluded payment of $130,000 is received first, and
▪ non-excluded payment of $65,000 is deemed to be received immediately after.
This enables the tax treatment for the separated payments to be determined:
▪ The $225,000 ETP cap amount applies to the excluded payment and the entire $130,000
of the genuine redundancy portion of the ETP attracts the ETP tax offset (maximum tax
rate of 17%)
▪ When the $65,000 non-excluded payment is added to his other taxable income of $165,000,
this exceeds $180,000 so the amount of ETP tax offset available is limited to the $15,000
remaining under the whole-of-income cap. Hence the first $15,000 of the non-excluded
payment attracts the ETP tax offset (maximum tax rate of 17%), while the remaining
$50,000 is taxed at 47%.
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Taxation of death benefit ETPs
A death benefit termination payment is a lump sum ETP made by an employer to a deceased
employee’s beneficiaries. It is received by a taxpayer after another person’s death, in consequence
of the termination of the other person’s employment.
Death benefit ETPs must be received no later than 12 months after the termination to be eligible
for concessional ETP tax treatment, though the same exemptions from the 12-month rule detailed
on page 2 also apply.
Payments to the trustee of a deceased estate are taxed in the estate. The maximum rate of tax
depends on whether the beneficiaries who have benefited, or are expected to benefit, from the
payment are dependants or non-dependants of the deceased.
A tax-free component may exist if there is a pre-July 83 segment and is not subject to tax.
The taxable component of a death benefit termination payment is subject to the ETP cap
amount. The table on the following page outlines the rates of tax applicable.
Advice tip
Death benefit termination payments made to a deceased estate and subsequently paid
to a beneficiary are not subject to the Medicare levy. This may reduce the tax payable for
non-dependants and for ETPs with taxable components exceeding the ETP cap. Furthermore,
payments for unused AL and LSL made on the death of an employee to the deceased’s
beneficiaries or the trustee of the deceased’s estate are exempt from tax18.
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Table 4: Taxation of lump sum unused AL and LSL payments19
Advice tip
Unused AL and LSL payments are included in assessable income and may affect entitlement
to certain tax offsets and concessions such as:
▪ Family Tax Benefit
▪ Government co-contribution
▪ Low Income Tax Offset, and
▪ Senior Australians and Pensioner Tax Offset (SAPTO).
An increase in income may also result in a client being liable for the Division 293 tax (additional
15% tax on concessional contributions).
Advice opportunities
Personal deductible and catch-up concessional contributions
The ability to claim a tax deduction for super contributions may allow many clients to manage
tax payable in the same financial year as receiving an ETP. Furthermore, the introduction of
catch-up concessional contributions means that some clients are eligible to contribute any unused
concessional cap from up to five previous financial years (accrued after 1 July 2018), allowing for
greater management of the tax implications of an ETP. However, eligibility for catch-up contribution
includes the client having a total superannuation balance below $500,000 on the prior 30 June.
Note: When recommending clients make super contributions, it’s important to remember that the amount
is preserved and a condition of release needs to be met to access the money.
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Division 293 tax
Care should be taken where a client’s taxable income (including the taxable ETP) plus concessional
contributions20 (CCs) will exceed the $250,000 Division 293 threshold. Although personal deductible
contributions are not included in taxable income, they are added back under the ‘income for
surcharge purposes’21 used for determining liability to pay Division 293 tax. The portion of non-
excessive CCs that sit above the $250,000 threshold are subject to an additional 15% tax.
Where a client’s taxable income (including the taxable portion of an ETP) already exceeds $250,000,
all non-excessive personal deductible contributions are subject to the additional 15% tax (ie 30% tax
in total). This can have undesired tax implications, particularly where the recipient of the ETP has
reached preservation age.
Advice tip
Given that some ETPs may be subject to maximum tax rates of 17% where the recipient has
reached preservation age, this strategy could potentially cause a client to pay more tax in some
circumstances. Clients may also consider making non-concessional contributions if they have
surplus cash to boost the tax-free component of their super, though this would have no impact
on their tax liability.
Please refer to ‘Guide to concessional contributions’ and ‘Div. 293 tax explained’ available
in the Technical section of MLC AdviserOnline for more information on catch-up CCs and Division
293 tax.
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Centrelink considerations
Impact of termination payments on Centrelink waiting periods
If a client is considering applying for Centrelink benefits, waiting periods may apply, depending on
the support payment. These may include:
▪ an ordinary waiting period
▪ income maintenance period, and/or
▪ liquid assets waiting period.
Clients subject to waiting periods need to ensure they have sufficient funds available to meet ongoing
expenses during that time.
Ordinary waiting period
The ordinary waiting period is seven days and applies to JobSeeker Payment, Parenting Payment
and Youth Allowance (jobseekers). This waiting period commences from the date of claim and is
served in addition to the liquid assets waiting period.
Liquid assets waiting period
The liquid assets waiting period (LAWP) is a period an individual will be ineligible to receive
Government income support payments. Liquid assets are readily available assets such as bank
accounts, terms deposits, shares and managed funds. The LAWP is a maximum of 13 weeks
and applies to:
▪ Jobseeker Payment26
▪ Youth Allowance and
▪ Austudy payment.
It is measured from the date employment ceased where a person is made redundant. The waiting
period (up to maximum period of 13 weeks)24 is calculated as follows:
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There is no maximum period for the IMP. The IMP applies to:
▪ JobSeeker Payment26
▪ Parenting Payment
▪ Youth Allowance
▪ Austudy Payment, and
▪ Disability Support Pension.
The gross amount of payments received from the employer is used in the calculation.
The IMP can be served concurrently with the LAWP.
Voluntary unemployment – non-payment period
Individuals applying for JobKeeper Payment after leaving employment voluntarily or due to
misconduct may need to serve an eight-week non-payment period. This period commences
from the date employment ceased and can be served concurrently with other waiting periods.
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Appendix A – Tax-free component of ETPs
Invalidity segment
An invalidity segment of an ETP occurs when an employee has their employment terminated, before
their last retirement day, due to ill-health and are assessed by two qualified medical practitioners to
be unable to return to work in a position they are reasonably qualified because of education,
experience or training.
The invalidity segment of an ETP is calculated using the following formula that apportions part of the
ETP to the tax-free component.27
Pre-July 83 segment
An ETP includes a pre-July 1983 segment if any of the employment to which the payment relates
occurred before 1 July 1983. The pre-July 1983 segment is part of the tax-free component of the ETP
and is calculated using the following formula.28
27 ITAA97 s82-150
28 ITAA97 s82-155
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Appendix C – Dependant for death benefit ETP tax purposes
A dependant of the deceased includes, at the time of their death, any of the following:
▪ a surviving spouse
▪ a former spouse
▪ a child of the deceased who is less than 18 years old
▪ any other person who was financially dependent on the deceased
▪ any person who had an interdependency relationship with the deceased.
Any person other than those described above is considered a non-tax dependant for death
benefit ETP purposes and subject a higher rate of tax on amounts within the ETP cap.
Contact details
For further information, please contact MLC Technical Services on 1800 645 597.
This communication is for adviser use only and must not be provided to clients. Information in this
communication is current as at the date of publication. While care has been taken in the preparation
of this communication, no liability or responsibility is accepted by IOOF or any of its subsidiaries, or by
any agents, officers or employees of IOOF and its subsidiaries, for any loss arising from reliance on this
communication. Any opinions expressed constitute our views at the time of issue and are subject to change.
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