Termination Payment categories taxed differently

There are concessional taxation provisions applicable to eligible ’employment termination payments’ –

• received consequent to dismissal from employment,
• under specified circumstances.

Detailed below are the conditions that determine when a payment made is an eligible termination payment.  Since around 2012, the process has changed.  Unfortunately, it is somewhat more complex than was the case prior to that change.

Common payments received on termination of employment are –

An employee leaving their job under conditions eligible to classify as “bona-fide redundancy” will generally receive –

• additional payments to those that would apply, if
• they had resigned, or been
• dismissed for disciplinary reasons.

Portion of these additional payments, are subject to concessional tax treatment, as ’employment termination payments’,

Approved early retirement schemes and ‘bona fide’ redundancy schemes need to meet certain strict criteria. A genuine redundancy payment is –

• a payment made to an employee dismissed, or
• made redundant involuntarily, because
  • the job they performed has been abolished; or
  • they have accepted an early retirement under an approved scheme.

The employer will advise their employees as to their respective eligibility for the concessional treatment.

…and which termination payment categories are eligible for concessional treatment?

Amounts you may receive include:

• Payment under relevant agreement, in lieu of notice (include in redundancy concessional calculation)
• Severance payment of a number of weeks’ pay for each year of service (include in redundancy concessional calculation)
• A gratuity or ‘golden handshake’ (include in redundancy concessional calculation)
• Outstanding wages or salary (and related allowances and benefits) due to you when you leave: (not treated concessionally)
• Lump sum payments of unused annual leave or leave loading paid on termination of employment. (See rates applicable in Table below)
• Lump sum payments of unused long service leave paid on termination of employment under a formal arrangement. (See rates applicable in Table below); and
• Accumulated superannuation paid in lieu (in eligible circumstances) – (not treated concessionally)

Taxation of Annual Leave and Long Service Leave

The following table displays the taxation applicable to –

• Annual Leave, and
• Long Service Leave,

when the payment is made due to approved early retirement schemes, and under ‘bona fide’ redundancy schemes.

* plus Medicare levy

How are payments for Bona-Fide Redundancy and Approved Early Retirement Schemes taxed?

A part of the redundancy payment is tax-free. This amount depends on The length of service with the employer determines the payment amount.  It is calculated as –

• $7,732 plus,
• an additional $3,867 (for 2009/10 and indexed to AWOTE each 1 July) for each full year of completed service.

NOTE. For the most recent update on the relevant amounts, refer to the ATO website table:

• – Table 19: Genuine redundancy and early retirement scheme payment limits.].

The tax-free amount of a bona fide redundancy or approved early retirement scheme is not an ETP.  These must be taken as cash.

For example, if Patrick had worked for his employer for –

• 11 years and 3 months up to July 2009, he would have completed
• 11 full years of service, and would therefore be
• entitled to a tax free redundancy payment of up to: $7,732 + ($3,867 x 11) = $50,269.

Note.  A lifetime benefit cap applies to the amount of payments taxed concessionally. For the 2015-16 taxation year, that amount is $195,000. This amount is indexed, changing when indexation increases the cap amount by at least $5,000.  This indexation only increments in $5,000 lots.

There is also a ‘whole of income’ cap to apply.  Taxation on the ETP (Employment Termination Payment) is calculated according to individual circumstances.  Reference the information in this page on the ATO website for relevant year information.

Employment Termination Payments are paid as a lump sum.

What should you do?

If you are being terminated from employment under an arrangement that is accompanied by termination payment amounts –

• such as mentioned above as being subject to concessional  tax treatment –
• you will benefit from taking financial advice from a financial planner,
• to take advantage of the tax and wealth accumulation benefits that can flow if properly managed.

To arrange an appointment with one of the Continuum Financial Planners experienced team to discuss your situation –

• phone our office, on 07-34213456, or
• at your convenience, use the linked Book A Meeting facility.

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Acknowledgement: we substantially utilised material provided by Securitor in the original drafting of this article.  In updated revisions we have drawn on material published on the ATO website, presented in a more user friendly summation.

(This article was originally posted by us in December 2009.  We occasionally update/ refresh it, most recently in April 2025.)