What is an ETP?
An employment termination payment (ETP) is a lump sum payment received in consequence of the termination of employment. It can include:
- a payment for unused rostered days off or unused sick leave
- a payment in lieu of notice
- a gratuity or ‘golden handshake’
- an amount of a genuine redundancy or early retirement scheme payment in excess of the tax free component
- a payment because of termination due to an employee’s invalidity (other than compensation for personal injury)
- certain payments after the death of an employee
Certain types of payments are not considered to be an ETP including:
- superannuation benefits
- a payment for unused annual leave and unused long service leave
- the tax free component of a genuine redundancy or early retirement scheme payment
- a compensation payment for personal injury
- a payment for a restraint of trade
For the payment to be considered an ETP it must generally be received no later than 12 months after the termination, unless it is a genuine redundancy or early retirement scheme payment (other exceptions may apply).
Are there different types of ETPs?
An ETP will be classified as either a life benefit termination payment (life benefit ETP) or a death benefit termination payment (death benefit ETP).
A life benefit ETP is paid to an individual in consequence of the termination of their employment. A death benefit ETP is paid after an individual’s death, in consequence of the termination of their employment.
Can an ETP be rolled over to super?
Transitional arrangements allowing an ETP to be rolled over into superannuation in limited circumstances ended on 30 June 2012.
ETPs made from 1 July 2012 cannot be rolled over into superannuation – all ETPs must be paid directly to the individual or their beneficiaries (for death benefit ETPs).
How is an ETP taxed?
An ETP may consist of two components - a tax free component and a taxable component.
The tax free component (if any) may include an amount relating to an invalidity payment and/or an amount relating to the individual’s employment which occurred before 1 July 1983.
The tax free component is not taxed (it is non-assessable non-exempt income).
The taxable component is the remainder of the ETP after the tax free component has been determined.
For a life benefit termination payment, the tax treatment of the taxable component depends on the age of the individual and whether or not the ETP is an excluded payment (discussed below).
The table below details the tax treatment of a life benefit ETP received from 1 July 2019.
For a death benefit termination payment, the tax treatment of the taxable component depends on whether the ETP is paid to a dependant or non-dependant beneficiary (see Macquarie Fastfact: Meaning of dependant for super and tax purposes).
The table below details the tax treatment of a death benefit ETP received from 1 July 2019.
What is the cap?
Life benefit ETPs
If the life benefit ETP is an excluded payment, an ETP cap amount of $210,000 applies in the 2019/20 financial year. The life benefit ETP cap is reduced by the taxable component of previous life benefit ETPs received relating to the same termination or ETPs that were received in the same financial year. It is increased annually in line with indexation (see later).
An excluded payment includes:
- a genuine redundancy payment1 (including payments that would otherwise qualify as a genuine redundancy except for the individual’s age)
- an early retirement scheme payment1
- a payment that includes an invalidity segment1, and
- certain types of compensation which are regarded as ETPs.
For ETPs that are not excluded payments, such as golden handshakes or gratuities, a separate $180,000 whole of income cap is applied in addition to the $210,000 ETP cap. The $180,000 whole of income cap is reduced by other taxable income (excluding the ETP) for the financial year in which the ETP is paid.
In 2019/20 the cap for non-excluded payments is the lesser of:
- the ETP cap (ie $210,000 less the taxable component of any previous ETPs related to the same termination or received in the same financial year), and
- the $180,000 whole of income cap less other taxable income.
Jack is age 62 and has taxable income from salary and investments of $150,000 in the 2019/20 financial year. He retires in September 2019 and receives a golden handshake from his employer of $60,000.
The golden handshake is a non-excluded payment and the cap used to determine tax payable on the ETP is the lesser of:
- $210,000, and
- $180,000 - $150,000 = $30,000
As Jack has other taxable income of $150,000, only $30,000 of the ETP is taxed at the concessional rate of 17% (including Medicare levy).
The remaining $30,000 is taxed at 47% (including Medicare levy), bringing total tax payable on the golden handshake to $19,200.
Death benefit ETPs
A separate ETP cap of $210,000 in 2019/20 applies to death benefit ETPs.
The death benefit ETP cap is reduced by the taxable component of previous death benefit ETPs received by the individual that relate to the same termination. It is increased annually in line with indexation.
The ETP cap, for both life benefit and death benefit ETPs, is indexed annually (at each 1 July) with AWOTE and rounded down to the nearest $5,000. The $180,000 whole of income cap is not indexed.