Withholding from the ETP
The $180,000 whole-of-income cap is reduced by any other taxable income earned in the income year, either before or after receiving the ETP.
For the purposes of withholding from the ETP, you work out the cap based on the employee's taxable income before they are terminated.
If the employee earns more taxable income in the same income year after the termination – for example, they get another job – they may pay more tax on their ETP when they lodge their tax return. This is because the taxable income earned after the termination will further reduce their whole-of-income cap.
Example: applying the whole-of-income cap
Emilio is a 61-year-old former commercial pilot who retired from his job in November 2023. His taxable income from his wages in 2023–24 up to that point was $100,000. His employer paid him an ETP of $50,000, in the form of a gratuity.
Emilio's ETP is a non-excluded ETP, so the lesser of the 2 caps applies:
- Emilio's whole-of-income cap is reduced from $180,000 to $80,000 because he earned $100,000 in 2023–24.
- This is less than his ETP cap ($235,000 for 2023–24), so the calculated whole-of-income cap applies to his ETP.
Since Emilio's ETP ($50,000) is less than his calculated whole-of-income cap ($80,000), his entire ETP is taxed at concessional rates.
Emilio has reached his preservation age, so his employer withholds tax at a rate of 17% from his ETP.
End of exampleOther taxable income for whole-of-income cap
The whole-of-income cap takes into account other taxable income that the employee earns in the same income year. Other taxable income is assessable income minus deductions the employee is entitled to.
Taxable income includes:
- salary or wage income (including payments for overtime)
- bank interest
- bonuses
- accrued leave paid when an employee is terminated
- the taxable component of other ETPs received earlier in the same income year – see Example: ETP paid in instalments.
If the employee receives a lump sum payment for unused long service leave that accrued before 16 August 1978 (shown at label B on your Income statement or a PAYG payment summary – individual non-business), only 5% of this payment is included in other taxable income.
Taxable income excludes:
- reportable fringe benefits
- salary sacrifice items
- super guarantee
- reportable employer super contributions
- reimbursements of work-related expenses
- the taxable component of the excluded part of a single ETP that's part excluded and part non-excluded – see
Example: including taxable income in the whole-of-income cap
In August 2023, Tyrone's job is terminated. He receives:
- a $100,000 gratuity
- $20,000 for accrued leave
- $5,000 in salary for the period from 1 July 2023 to the date of termination.
Tyrone's whole-of-income cap is reduced from $180,000 to $155,000 because he received $25,000 in salary and accrued leave payments.
Because Tyrone has not reached his preservation age, his employer withholds 32% in tax from the $100,000 ETP. Tyrone's employer gives him a PAYG payment summary – employment termination payment showing:
- Total tax withheld: $32,000
- Date of payment: 15 August 2023
- Taxable component: $100,000
- Tax-free component: Nil
- ETP code: O.
Tyrone gets a new job in September 2023 and earns a further $60,000 salary in the 2023–24 income year.
When calculating the tax on Tyrone's ETP at the end of the income year, his calculated whole-of-income cap is further reduced to $95,000. His is calculated as $180,000 minus:
- $5,000 salary from his first job
- $20,000 accrued leave payment
- $60,000 salary from his second job.
As Tyrone's ETP of $100,000 is greater than his whole-of-income cap of $95,000, an amount of $5,000 will be taxed at the highest tax rates (47% in 2023–24) when he submits his tax return. Tyrone will need to pay an additional 15% tax on the $5,000 (32% tax has already been withheld by his employer). As a result, Tyrone will have a tax debt of $750.
End of exampleTax losses and the whole-of-income cap
Tax losses are not taken into account in working out the whole-of-income cap.
Example: ETPs and tax losses
Mike retires on 1 July 2023 and receives an ETP of $200,000. The ETP is subject to the whole-of-income cap of $180,000. Mike's employer withholds at:
- concessional tax rates from the first $180,000 of the ETP
- the highest tax rate (47% in 2023–24) from the $20,000 that is above the cap.
Mike has some negatively geared investments which resulted in a tax loss of $20,000 during 2023–24. He had a nil taxable income (not including ETPs) during 2023–24.
Mike’s whole-of-income cap remains at $180,000 because his taxable income is nil.
End of exampleMultiple payments
Both the whole-of-income cap and the ETP cap are reduced by any earlier life benefit ETPs paid to the employee in the same income year, even if they are for different terminations.
In addition, the ETP cap is reduced by any earlier life-benefit ETPs paid for the same termination, even if the payments are in different income years.
These reductions affect the caps for:
- an ETP paid in instalments
- multiple ETPs
- a single ETP that includes excluded and non-excluded payments.
The death benefit ETP cap amount is independent of the life benefit ETP cap amount. Payments that count towards one cap don't count towards the other.
ETP paid in instalments
You may choose to pay an ETP in instalments. For payments made after the initial payment, the cap amount is reduced by the previous payment or payments for the same termination that counted towards the cap.
Example: ETP paid in instalments
Craig retired from his job in a law firm in December 2023 and received a termination payment of $100,000 paid in two instalments – $50,000 in December 2023 and $50,000 in June 2024. At the time he retired, he had taxable income from wages of $95,000.
Craig’s ETP was a non-excluded termination payment that is subject to the lesser of the ETP cap and whole-of-income cap.
His whole-of-income cap ($180,000) is reduced to $85,000 – that's, $180,000 minus $95,000 taxable income from wages. His ETP cap is $235,000 for 2023–24. The whole-of-income cap will apply because it is the lesser of the two caps.
Craig’s first payment of $50,000, received in December 2023, is less than the calculated whole-of-income cap of $85,000 and will be concessionally taxed. His whole-of-income cap is now further reduced to $35,000 – that is, $85,000 minus the $50,000 termination payment.
For the second payment of $50,000, received in June 2024, only $35,000 falls within the calculated whole-of-income cap and is taxed at a concessional rate. The remaining $15,000 is taxed at the highest tax rate (47% in 2023–24).
End of exampleMultiple ETPs
The ETP cap is reduced by earlier life benefit ETPs for the same termination, even if they're paid in different income years. This prevents splitting payments to avoid the ETP cap.
The ETP cap is also reduced by any earlier ETP received in the same income year, even if it's for a different termination.
Example: multiple ETPs for the same termination paid in different financial years
Lloyd's employment is terminated in June 2023 and he receives a $120,000 ETP. His final entitlements are calculated several weeks later and a second ETP of $120,000 is paid in August 2023.
Both payments are excluded payments that are subject only to the ETP cap.
The first ETP of $120,000 is paid in 2022–23. It's less than the ETP cap ($230,000 in 2022–23) and is therefore concessionally taxed.
Lloyd’s ETP cap for the second ETP of $120,000 paid in 2023–24 is only $115,000. This is because the $235,000 ETP cap for 2023–24 is reduced by the earlier ETP for the same termination – that is, $235,000 minus $120,000.
As a result, $5,000 of the ETP – that's the $120,000 ETP minus the reduced ETP cap of $115,000 – will be taxed at the highest tax rate (47% in 2023–24).
End of exampleSingle ETP with excluded and non-excluded payments
A single ETP may contain both:
- an excluded part (for example, a genuine redundancy payment) that is subject solely to the ETP cap
- a non-excluded part (for example, a gratuity) that's subject to the lesser of the ETP cap and whole-of-income cap.
The excluded part is taken into account first, then the non-excluded part. You should apply the:
- ETP cap to the excluded part
- lesser of the remaining ETP cap and the whole-of-income cap to the non-excluded part. When calculating the whole-of-income cap, the employee's taxable income includes the taxable component of the excluded part.
You'll need to issue 2 ETP payment summaries – one for the excluded part and one for the non-excluded part.
Example: single ETP with excluded and non-excluded parts
Robyn receives a single ETP of $170,000 in 2023–24. It consists of 2 parts:
- $120,000 compensation for unfair dismissal – this is an excluded payment that is subject to the ETP cap only
- a $50,000 gratuity – this is a non-excluded payment that is subject to the lesser of the whole-of-income cap and ETP cap.
Robyn also earned $20,000 in salary and wages.
Even though the 2 parts are in the one ETP, the excluded part is taken as being received first. The entire $120,000 of her compensation payment is an excluded payment and is taxed at a concessional rate because it is less than the ETP cap.
The balance of the ETP cap is $115,000 ($235,000 for 2023–24 minus $120,000).
The gratuity part of Robyn’s ETP is subject to the lesser of the two caps. Robyn’s calculated whole-of-income cap is $40,000 ($180,000 reduced by her $20,000 salary, and the $120,000 compensation).
Because Robyn's whole-of-income cap ($40,000) is the lesser of the two caps, it applies to her $50,000 gratuity. Only $40,000 of Robyn's gratuity will receive concessional tax treatment.
End of exampleWithholding and income statements or payment summaries
Employers need to:
- withhold from the taxable component of the ETP at the correct rate. The rate depends on the applicable cap and, for life benefit ETPs, whether the employee has reached their preservation age.
- enter the appropriate codes on the employee's ETP income statement or ETP payment summary, to confirm the correct rate of tax has been applied.
If you're using Single Touch Payroll to report the ETP, it's included on the employee's income statement. Otherwise, you need to give the ETP payment summary to the employee within 14 days of paying the ETP.
See Tax table for employment termination payments to work out the:
- employee's preservation age
- the amount to withhold
- the codes to enter on the employee's payment summary.
You can use the ETP payment summary paper form available from us or an equivalent payment summary produced by your payroll software.
Example: single ETP with excluded and non-excluded parts and unused leave payments
After 5 years' service, Alec, who's 30 years old, is made redundant from his place of work in 2023–24. He receives the following payments in his termination pay:
- redundancy pay – $40,000.00
- unused sick leave – $6,247.00
- payment in lieu of notice – $1,723.42
- unused annual leave – $5,234.17
- unused long service leave – $11,423.91
- gratuity – $25,000.00.
Under Alec's workplace agreement, payment in lieu of notice and the gratuity are payable on termination of employment – this means they are paid for any type of departure, including voluntary termination. Alec's employer has contacted us and confirmed that his redundancy meets the conditions of a genuine redundancy. This means the redundancy payment and unused sick leave payment are in excess of what was reasonably expected to be paid for a voluntary termination.
The redundancy payment and unused sick leave payment are excluded payments and the ETP cap applies. The payment in lieu of notice and gratuity are non-excluded payments, and the lesser of the ETP cap and whole-of-income cap applies.
Alec had previously received $140,000 in other taxable payments (salary and wage income) during the income year.
Step | Action | Result |
|---|---|---|
1 | Calculate the genuine redundancy payment The redundancy payment and unused sick leave qualify as genuine redundancy: $40,000 + $6,247. | $46,247 |
2 | Calculate the tax-free limit on the genuine redundancy payment The tax-free amount in 2023–24 is $11,985 + $5,994 for each completed year of service. Alec has 5 years of completed service: $11,985 + (5 × $5,994) Note: The result is shown at label D on a PAYG payment summary – individual non-business. | $41,955 |
3 | Calculate the taxable component of the genuine redundancy part of the payment This is the genuine redundancy payment from step 1 minus the tax-free limit amount from step 2: $46,247 − $41,955 Note: The result is shown at Taxable component on a PAYG payment summary — employment termination payment with ETP code R. Because this part of the termination payment is an excluded payment, only the ETP cap applies. Alec is under the preservation age which means the excluded payment of $4,292 will be taxed at 32%. | $4,292 ETP code R |
4 | Calculate the remaining ETP cap This amount is the ETP cap ($235,000 for 2023–24) minus the taxable component of the excluded payment (from step 3): $235,000 − $4,292. | $230,708 |
5 | Calculate the non-excluded payment The non-excluded part of the termination payment is the payment in lieu of notice and the gratuity: $1,723 + $25,000. Note: The result is shown at Taxable component on a separate PAYG payment summary – employment termination payment with ETP code O. | $26,723 ETP code O |
6 | Calculate the whole-of-income cap This is the whole-of-income cap of $180,000 minus other taxable income:
Note: The whole-of-income cap is not reduced by the excluded part of the termination payment because it was received at the same time as the non-excluded payment – that is, it was not received earlier in the income year. | $23,343 (calculated whole-of-income cap) |
7 | Determine the lesser of the ETP caps Alec's non-excluded payment will be subject to the lesser of the remaining ETP cap or the whole-of-income cap:
| $23,343 (calculated whole-of-income cap is the lesser cap) |
8 | Apply the calculated whole-of-income cap to the non-excluded payment The non-excluded payment ($26,723 from step 5) is taxed concessionally up to the calculated whole-of-income cap of $23,343. The remainder of the non-excluded payment ($26,723 − $23,343 = $3,380) is above the whole-of-income cap and is taxed at the highest tax rate (47% in 2023–24). | $23,343 taxed at 32% $3,380 taxed at 47% |
Alec's payments for unused annual and long service leave totalling $16,657 are not part of his ETP. They are taxed separately and reported on his PAYG payment summary – individual non-business.
End of exampleFor more information see PAYG payment summary – employment termination payment.