Tax treatment of an ETP
ETPs are generally fully taxable although in some cases they may also contain a tax-free amount.
After any tax-free amount is deducted from your payment, the balance is the taxable component. The taxable component of your ETP will be concessionally taxed up to certain limits, known as caps. The 'whole-of-income cap' or the 'ETP cap'.
Any amount over the relevant cap will be taxed at the top marginal rate of 47% (45% plus Medicare levy of 2%).
Tax-free amount
A tax-free amount relates to:
- a pre-1983 component of employment
- an invalidity component
- the tax-free element of a genuine redundancy.
The tax-free component is not:
- assessable or exempt income (it is tax free) in all cases
- an amount you need to report in your return.
Taxable component
The type of termination payment will determine which cap applies to the taxable component and will fall into one of 2 payment categories:
- excluded
- non-excluded.
Excluded payments
The term 'excluded payments' refers to the following types of payments:
- genuine redundancy or early retirement scheme payments that exceed the tax-free limit
- invalidity
- compensation for personal injury, unfair dismissal, harassment or discrimination
- death benefit termination (see Death benefit employment termination payments).
The taxable component of these payments will be concessionally taxed up to the 'ETP cap'.
Non-excluded payments
The term 'non-excluded' may include the following payments:
- a ‘golden handshake’
- non-genuine redundancy payment
- severance pay
- a gratuity
- payment in lieu of notice
- unused sick leave
- unused rostered days off.
These payments are concessionally taxed up to the smaller of the ETP cap or the whole-of-income cap after they are reduced by your other amounts.
Your ETP is subject to the whole-of-income cap, if the code on your end of year statement is O or P.
Concessional rates and caps
The concessional tax rate is:
- 17% if you reach your preservation age
- 32% if you have not reached preservation age, up to the relevant cap.
Amounts above the caps are taxed at the top marginal rate of 47% (45% plus Medicare levy of 2%) – see Table A: Withholding rates for ETPs.
The ETP cap amount for the 2023–24 income year is $235,000. This amount is indexed annually.
The whole-of-income cap is $180,000, this amount is not indexed. This cap is reduced by any other taxable income payments you receive in the income year.