Introduction

When you’re leaving a job, whether by choice or circumstance, you’re often entitled to more than just a final payslip. That’s where Employment Termination Payments (ETPs) come into play. Understanding how ETPs are taxed and what’s included can help you make informed financial decisions and avoid surprise ATO debts later

Professional meeting between employee and HR manager discussing employment termination payment (ETP) in a modern Australian office. A cardboard box with personal items on the desk symbolizes job transition, redundancy, or resignation. Perfect visual representation for blog about ETP taxation, redundancy payouts, and employee entitlements in Australia.

What Is an Employment Termination Payment (ETP)?

An ETP is a lump sum payment you may receive when your employment ends. It’s separate from your regular salary and is often taxed differently in some cases, at a lower concessional tax rate.

Your ETP may include:

  • Payments instead of notice
  • A gratuity or “golden handshake”
  • Unused sick leave or rostered days off
  • Invalidity payments due to permanent disability
  • Compensation for wrongful dismissal or loss of job
  • The taxable part of a redundancy or early retirement that exceeds the tax-free cap
  • Transfer of property or assets (such as a company car, less any amount paid for it)

Note: ETPs do not include superannuation, unused annual leave, or long service leave payments. These are treated separately for tax.

What Tax Will I Pay on an ETP?

One of the biggest benefits of ETPs is that some components may be taxed at concessional rates  but only if they are paid within 12 months of your termination.

ETPs have three possible tax treatments:

  1. Tax-free – Includes invalidity payments or work done before 1 July 1983
  2. Concessionally taxed – If under the annual ETP cap (2025 cap is approx. $235,000*)
  3. Taxed at the top marginal rate – Any amount exceeding the cap (45% + 2% Medicare Levy)

Cap thresholds vary yearly check the current ATO ETP cap. ETPs cannot be rolled over into superannuation.

What About Unused Leave or Redundancy Payouts?

If you’re paid for unused annual or long service leave, or receive a genuine redundancy or early retirement payout, the ATO treats these differently:

  • Genuine redundancy up to a certain limit is tax-free
  • Unused leave entitlements may be taxed at a lower rate than your normal income
  • These amounts are usually reported as Lump Sum A or Lump Sum B on your income statement

What If My ETP Is Paid After 12 Months?

If your ETP is delayed beyond 12 months, it won’t be eligible for concessional tax rates. It’ll instead be taxed at your marginal rate, which may be significantly higher.This makes it important to:

  • Review your termination payout timeline
  • Speak to a tax professional early
  • Lodge your tax return carefully to avoid ATO penalties or underpayment issues

Why Understanding ETPs Matters in 2025

With economic shifts and industry layoffs, more Australians are facing unexpected job changes. And with the ATO’s data-matching technology, under reporting or incorrectly lodging an ETP can trigger audits or delays.

By understanding your entitlements and tax treatment upfront, you:

1. Avoid overpaying tax
2. Protect your retirement strategy
3. Stay ATO-compliant

Need Help With Your ETP or Final Pay Tax?

At Tax NextGen, we assist Australians with reviewing and correcting tax on ETPs, final pays, and redundancy payments. Whether you’ve just received a payout or need to amend a past return, our team ensures it’s done accurately without the stress.