The taxable portion of an employment termination payment is taxed at 17% if you have reached your preservation age, or 32% if you have not, up to a dollar cap.1Australian Taxation Office. How ETP Components Are Taxed Anything above the cap is taxed at 47% (the 45% top marginal rate plus the 2% Medicare levy). Both concessional rates already include the Medicare levy. The gap between the concessional rate and 47% can run to tens of thousands of dollars on a large payout, so the rate you pay depends less on the headline percentage than on how the caps interact with your age, your other income, and the type of payment.
How Your Age Sets the Rate
Your age on the day the payment lands in your account determines which concessional rate applies, not the date you were terminated. Preservation age is the earliest age you can access superannuation, and it steps up with date of birth:2Australian Taxation Office. Payments From Super
- Born before 1 July 1960: 55
- 1 July 1960 to 30 June 1961: 56
- 1 July 1961 to 30 June 1962: 57
- 1 July 1962 to 30 June 1963: 58
- 1 July 1963 to 30 June 1964: 59
- Born from 1 July 1964: 60
If you have reached preservation age when the payment is made, the taxable component within the cap is taxed at a maximum of 17%. If you have not, it is 32%.1Australian Taxation Office. How ETP Components Are Taxed Timing a payment so it falls after a birthday can, in some cases, be worth negotiating.
The Two Caps That Decide How Much Qualifies for the Concessional Rate
There are two dollar caps, and which one bites depends on the type of payment you receive. Anything above the applicable cap is taxed at 47%.1Australian Taxation Office. How ETP Components Are Taxed
The ETP Cap
The ETP cap is indexed each year. For the 2024–25 income year it is $245,000.3Australian Taxation Office. Employment Termination Payments It applies across all ETPs you receive in the income year from all employers combined. Receive a $300,000 non-excluded ETP with no other income, and the first $245,000 is taxed at the concessional rate; the remaining $55,000 is taxed at 47%.
The Whole-of-Income Cap
The whole-of-income cap is fixed at $180,000 and is not indexed.4Australian Taxation Office. Working Out the Whole-of-Income Cap Amount It is reduced by any other taxable income you earn in the year. If you earned $100,000 in salary before termination, the whole-of-income cap for your ETP is $80,000. Only $80,000 of the payment gets the concessional rate; the rest is withheld at 47%.
When both caps apply, the employer must use the smaller one. That is the mechanic that surprises high earners who are terminated part way through the year: even though the ETP cap looks generous, the whole-of-income cap can shrink to almost nothing once mid-year salary is counted against it.
Which Cap Applies to Your Payment
Only the ETP cap applies to excluded ETPs. These include the portion of a genuine redundancy or early retirement payment that exceeds the tax-free limit, invalidity payments, compensation for personal injury, unfair dismissal, harassment, or discrimination, and death benefit termination payments.1Australian Taxation Office. How ETP Components Are Taxed
Both caps apply to non-excluded ETPs, and the smaller of the two governs. These include golden handshakes, non-genuine redundancy payments, severance pay, gratuities, payments in lieu of notice, and payouts for unused sick leave or rostered days off.1Australian Taxation Office. How ETP Components Are Taxed
What Counts as an ETP
An ETP is a lump sum paid by your employer because your employment ended. It must arise from the termination itself, not from work performed. Golden handshakes, gratuities for long service, payments in lieu of notice, compensation for wrongful dismissal, and payouts for unused sick leave or rostered days off are the common examples.1Australian Taxation Office. How ETP Components Are Taxed
Several things that arrive alongside an ETP are taxed under separate rules and should not be lumped in:
- Unused annual leave and long service leave are taxed as separate lump sums at their own concessional rates.
- Salary, wages, bonuses, and allowances for work already done are ordinary income.
- Superannuation benefits are taxed under the super rules.
- The tax-free part of a genuine redundancy payment is entirely tax-free and never enters the ETP calculation.
If your employer classifies unused annual leave as part of the ETP, you can end up overpaying or hitting a cap sooner than you should. Check the breakdown before you sign.
Tax-Free Amounts That Come Off the Top
Before any rate is applied, three sources can strip tax-free dollars out of the payment:1Australian Taxation Office. How ETP Components Are Taxed
- A pre-July 1983 component, if part of your employment falls before that date.
- An invalidity component, if you are terminated because of permanent disability, covering the period you could have worked to retirement.
- The tax-free amount for a genuine redundancy or approved early retirement scheme.
The genuine redundancy tax-free amount is the one most people encounter. For 2025–26 it is $13,100 as a base, plus $6,552 for each complete year of service.3Australian Taxation Office. Employment Termination Payments After 10 complete years, that is $78,620 with no tax at all. Only the amount above that figure becomes an ETP and enters the rate-and-cap calculation.
The 12-Month Rule
To keep the concessional rates, the payment generally has to reach you within 12 months of the termination date.5Australian Taxation Office. The 12-Month Rule Miss that window and the payment loses its ETP status. It gets added to your assessable income and taxed at your marginal rates, which for a substantial payout can mean 45% plus Medicare on most of it. If a settlement is dragging, the payment date is worth negotiating as hard as the amount.
The TFN Trap
If you have not given your employer your Tax File Number by the time the payment is processed, the employer must withhold 47% on the entire taxable component. Your age and the caps make no difference. Handing over the TFN before payday is the cheapest thing you will do all year.
Death Benefit ETPs
Where a termination payment is made after an employee’s death to a dependant or the trustee of the estate, it is a death benefit ETP with its own separate cap that runs independently of the ordinary ETP cap.6Australian Taxation Office. Death Benefit Employment Termination Payments The cap is $245,000 for 2024–25. Payments to a tax dependant are generally tax-free; payments to a non-dependant get the concessional rate up to the cap and 47% above it.