Employment termination payments and superannuation lump sums

Updated: Nov 1, 2021

The taxation of termination payments differs depending upon whether the payment is an employment termination payment (ETP) or a superannuation lump sum.

Payments are not ETPs include payments in lieu of unused annual leave or unused long service leave. According to the ATO website, ETPs have up to three parts:

1. tax-free

The tax-free component comprises any invalidity amount and the pre-July 1983 amount. This component is non-assessable, non-exempt income, and therefore not subject to tax.

2. concessionally taxed

If the payment is made in cash and is received within 12 months of the termination. ETPs are not able to be paid into superannuation.

3. taxed at your marginal tax rate

The whole-of-income cap limits the tax offset to that part of the ETP takes the person’s total annual taxable income to no more than $180,000. The balance is taxed at the top marginal tax rate. However, the concessional rates will apply to the whole of the payment if the ETP relates to a genuine redundancy and only the ETP cap will apply.

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