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Decide Whether Payment is an ETP
The employer needs to decide if any part of the lump sum payment is an ETP. Only certain employee termination payments are ETPs and they are taxed differently from other termination payments.
The following table shows which employee termination payments can be included in ETPs.
ETP |
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Non-ETP |
Gratuities |
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Accrued leave payments |
Severance pay |
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Payments below the genuine redundancy tax-free limit |
Non-genuine redundancy payments |
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Salary and wage income |
Payments in lieu of notice of termination |
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Super benefits (for example, a lump sum or income stream from a super fund) |
Compensation payments from employment and other disputes |
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Foreign termination payments |
Payments because of invalidity or death of the employee |
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Certain payments for restraint of trade |
Amounts more than the genuine redundancy limits. |
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Certain payments for personal injury if you are compensated for your inability to be employed |
Calculate ETP Components
The gross ETP needs to be split into its components to correctly calculate tax. An ETP can be split into three components, but it is usually split into only two, depending on the employee’s period of employment.
An ETP will always have a Post-June 1983 tax-free component because all employees have a period of employment after 30 June 1983.
An ETP will have this component only if the employee began working for the organisation before 1 July 1983. This component is not subject to tax.
This component is the least common of the three and it is linked to the employee’s “future employment period” that is lost through invalidity. An ETP may have this component if the employee leaves employment early because of a permanent disability.
Report Cash Payments to the ATO
Employers need to report the ETP Payment Summary information with the employer’s PAYG annual reporting to the ATO.
Keep Records
Employers must keep records about ETPs for five years from the payment date.
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Topic: 16637
