Taxation of termination payments
Tax payable on an ETP
The tax payable on an ETP depends on your age when your employment is terminated. If you have reached
preservation age in the income year your employment is terminated, a maximum tax rate of 16.5% (including
the Medicare levy) applies up to a cap amount. If you have not reached preservation age in the income year,
a maximum tax rate of 31.5% (including the Medicare levy) applies to the ETP up to a cap amount. This is
referred to as receiving concessional tax treatment or being eligible for the ETP tax offset. The amount
above the cap, regardless of your age, is taxed at the highest marginal tax rate of 46.5% (including the
Medicare levy).
Example 1: Employment termination payment with an invalidity segment
Jackson started work with XYZ Pty Ltd on 1 September 2005. He is no longer able to work on medical
grounds and is terminated on 20 September 2012 due to invalidity. Jackson will turn 65 years old on
25 September 2015. XYZ Pty Ltd is going to pay Jackson an ETP that is made up of the following
payments:
Golden handshake
$40,000
Unused rostered days off (RDOs)
$2,000
Unused sick leave
$10,000
Compensation
$50,000
Because each payment is made for termination due to invalidity, the whole ETP ($102,000) is used to
calculate the invalidity segment.
XYZ applies the invalidity formula to determine the invalidity segment:
$102,000
×
1,100
2,577 + 1,100
= $30,514
$30,514 of the $102,000 is the invalidity segment, which is the tax-free component, and the remaining
$71,486 is the taxable component. The ETP cap (only) applies to the payment and, as it is all below the
cap ($175,000 for 2012-13), it is taxed at a lower tax rate. As Jackson is above preservation age, XYZ
calculates the withholding amount as $11,795.19 (16.5% of $71,486) and issues Jackson an ETP
payment summary with the following information:
Total tax withheld:
$11,795
Date of payment:
20 September 2012
Taxable component:
$71,486
Tax-free component:
$30,514
ETP code:
R