ETP Tax Explained
An employment termination payment (ETP) is a lump sum paid because your employment ended. It is not taxed like salary. It is taxed at flat concessional rates up to a cap, and at 47% above it — and which cap applies depends on what kind of ETP it is.
Rules checked October 2026 · Figures for payments made from 1 July 2026 (FY2026-27) · No signup — nothing you enter anywhere on this site leaves your browser.
Want your own figure? Use the ETP Tax Calculator — enter your ETP amount, your preservation-age band at 30 June, and your other income, and it works out the withholding estimate with the working shown.
What an ETP is — and what it is not
An ETP is a lump sum paid in consequence of termination of employment. The life-benefit kind covered here may include:
- payment in lieu of notice
- a gratuity or ‘golden handshake’
- an invalidity payment for permanent disability
- compensation for loss of job or wrongful dismissal
- the part of a genuine redundancy payment or early retirement scheme payment that exceeds the tax-free limit
- unused sick leave and unused rostered days off (RDOs)
- the market value of property transferred, less any consideration paid
The following are not ETPs, and must not be taxed as ETPs:
- Unused annual leave or long service leave. These are taxed separately under ATO Schedule 7. Work them out with the Leave Payout Calculator, not the ETP calculator.
- The tax-free part of a genuine redundancy or early retirement scheme payment. That part is not an ETP at all (Lump Sum D) and is not assessable.
- Superannuation benefits, including any payment from a super fund.
- Foreign termination payments.
An ETP also has two components that are easy to confuse. The taxable component is what the rates below apply to. The tax-free component consists only of the invalidity segment and the pre-July 83 segment, taken from your payment summary. It is not assessable, and it is not the same thing as the genuine redundancy tax-free limit — never add the two together, and never call the redundancy limit an ‘ETP tax-free component’.
The two caps
Two caps decide how much of your ETP gets the concessional rate. They are not interchangeable:
| Cap | 2026-27 amount | Applies to |
|---|---|---|
| ETP cap | $270,000 | All ETPs. Indexed annually. Reduced by earlier ETPs for the same termination in the same income year: remaining ETP cap = $270,000 less those earlier payments (never below $0). |
| Whole-of-income cap | $180,000 | Non-excluded payments only. Not indexed. Reduced by your other taxable income in the same income year: whole-of-income cap = $180,000 less other taxable income (never below $0). The current ETP itself is excluded from that other income. |
For a non-excluded payment, the concessional rate applies only up to the smaller of the ETP cap and the whole-of-income cap. Anything above that smaller cap is taxed at 47%.
Excluded (code R) vs non-excluded (code O)
| Excluded — code R (ETP cap only) | Non-excluded — code O (smaller of the two caps) |
|---|---|
| Excess of a genuine redundancy or early retirement scheme payment over the tax-free limit; invalidity payments; compensation for personal injury, unfair dismissal, harassment or discrimination. | Golden handshakes; non-genuine redundancy payments; severance pay; gratuities; payment in lieu of notice; unused sick leave; unused RDOs; any other ETP not in the excluded list. |
Ordering matters. Where one termination produces both an excluded part and a non-excluded part, the excluded part is dealt with first against the ETP cap. The non-excluded part is then tested against the smaller of the remaining ETP cap and the whole-of-income cap. Worked example T8 below shows this ordering with exact figures.
The rates — including 2% Medicare
These are PAYG withholding rates from ATO Schedule 11, Table A. They include the 2% Medicare levy:
| Taxable component | Under preservation age | At or over preservation age |
|---|---|---|
| Up to the applicable cap | 32% | 17% |
| Above the applicable cap | 47% | 47% |
The 47% rate is the 45% top marginal rate plus the 2% Medicare levy. Withholding amounts are rounded to the nearest dollar, with amounts ending in 50 cents rounded up. These figures are withholding estimates: your final tax is settled when you lodge your return and can differ because of other income, offsets, HELP or STSL debts, and Medicare levy variations.
Genuine redundancy: the tax-free limit
Only the part of a genuine redundancy payment above the tax-free limit is an ETP. The limit for 2026-27 is:
Tax-free limit = $13,598 + $6,801 × completed years of service.
Only completed years count — part years do not. A payment at or below the limit is not an ETP at all (Lump Sum D) and is not assessable.
| Completed years of service | Tax-free limit |
|---|---|
| 5 | $47,603 |
| 8 | $68,006 |
| 10 | $81,608 |
A redundancy counts as genuine when the employer decided the job no longer exists and dismissed the employee because of it. It is not genuine if the dismissal is because the employee reached normal retirement age, is Age Pension age or older on the day of dismissal (Age Pension age is 67 for anyone born on or after 1 January 1957), leaves voluntarily, has a contract that simply ends, or is dismissed for disciplinary or inefficiency reasons. If the payment is non-genuine, no tax-free limit applies at all — the whole amount is a non-excluded ETP. If you volunteered in a redundancy round, confirm with your employer or the ATO whether your payment counts as genuine; this guide does not decide genuineness for you. The Redundancy Calculator works out the redundancy payment itself; this guide and the ETP Tax Calculator tax the ETP part.
The preservation-age trap: it is tested at 30 June
The age test is whether you have reached your preservation age by 30 June of the income year you receive the payment — not your age on the payment date. Someone aged 59 when paid who turns 60 before 30 June of that income year is in the 17% band, not the 32% band. Any tool that asks ‘how old are you now?’ and gives the 32% figure for that person is wrong.
Preservation age is not always 60. It depends on your birth date:
| Born | Preservation age |
|---|---|
| Before 1 July 1960 | 55 |
| 1 July 1960 – 30 June 1961 | 56 |
| 1 July 1961 – 30 June 1962 | 57 |
| 1 July 1962 – 30 June 1963 | 58 |
| 1 July 1963 – 30 June 1964 | 59 |
| After 30 June 1964 | 60 |
The 12-month rule
To receive concessional treatment, an ETP must generally be paid within 12 months of termination. A payment outside 12 months is a delayed termination payment: it is assessable at marginal rates, not at the concessional ETP rates. Do not mistake any withholding figure quoted for delayed payments for the concessional ETP calculation — it is not the same thing.
Exception: the 12-month rule does not apply to the taxable component of genuine redundancy payments and early retirement scheme payments.
Worked examples (from the ETP Tax Calculator acceptance tests)
All figures are PAYG withholding estimates, rounded to the nearest dollar. ‘Net’ means the payment less the tax estimate.
T1 — Excluded payment, under preservation age
Excluded (code R) taxable $45,000, no non-excluded part, under preservation age. Tax $14,400 (45,000 × 32%). Net $30,600.
T4 — Genuine redundancy split, 10 completed years
Genuine redundancy payment $120,000, 10 completed years, under preservation age. Tax-free limit $13,598 + (10 × $6,801) = $81,608. Taxable ETP $38,392. Tax $12,285 (38,392 × 32% = $12,285.44, rounded). Net $107,715.
T6 — Non-excluded payment and the whole-of-income cap
Non-excluded (code O) taxable $120,000, under preservation age, other taxable income $100,000. Whole-of-income cap = 180,000 − 100,000 = $80,000; applicable cap = the smaller of $270,000 and $80,000, so $80,000. Tax $44,400 (80,000 × 32% = $25,600, plus 40,000 × 47% = $18,800). Net $75,600.
T8 — Both parts, excluded dealt with first
Excluded (code R) taxable $397 plus non-excluded (code O) taxable $17,678, under preservation age, other taxable income $140,000. Excluded first: tax on the R part $127 (397 × 32% = $127.04, rounded). Remaining ETP cap = 270,000 − 397 = $269,603. Whole-of-income cap = 180,000 − 140,000 = $40,000. Applicable cap for the O part = the smaller of $269,603 and $40,000, so $40,000. Tax on the O part $5,657 (17,678 × 32% = $5,656.96, rounded). Total tax $5,784; gross $18,075; net $12,291.
T11 — The 30 June trap
Excluded (code R) taxable $45,000, user aged 59 at payment but will be 60 by 30 June of the income year of payment, so the band is ‘at or over preservation age’. Tax $7,650 (17%) — not $14,400.
Run your own numbers in the ETP Tax Calculator, including the split mode for genuine redundancy payments and the ordering when one termination produces both an excluded and a non-excluded part.
What is out of scope
- Death-benefit ETPs use different rates — this guide does not calculate them.
- Unused annual leave and long service leave are taxed under Schedule 7, not as ETPs. See the Leave Payout Calculator.
- Roll-over to super: an ETP cannot be rolled over to superannuation.
- Final tax on assessment: the figures here are withholding estimates, assuming an Australian resident who has provided a tax file number and pays the standard Medicare levy. They are not your final tax bill.
- Your whole final pay: wages, notice, leave and redundancy together are covered by the Final Pay Calculator.
Frequently asked questions
What is an employment termination payment (ETP)?
A lump sum paid in consequence of termination of employment — for example, a golden handshake, payment in lieu of notice, or the part of a genuine redundancy payment above the tax-free limit. A payment from a super fund is not an ETP, and unused annual leave or long service leave are not ETPs either — they are taxed separately under Schedule 7.
What is the ETP cap for 2026-27?
The ETP cap is $270,000 for payments made from 1 July 2026. It is reduced by earlier ETPs for the same termination in the same income year, so the remaining cap is $270,000 less those earlier payments (but never below $0).
What is the whole-of-income cap, and when does it apply?
The whole-of-income cap is $180,000 less your other taxable income in the same income year (but never below $0). It applies only to non-excluded payments (code O). Excluded payments (code R) are tested against the ETP cap only.
What is the difference between an excluded and a non-excluded ETP?
Excluded payments (code R) are the excess of a genuine redundancy or early retirement scheme payment over the tax-free limit, invalidity payments, and compensation for personal injury, unfair dismissal, harassment or discrimination. Non-excluded payments (code O) are everything else — golden handshakes, non-genuine redundancy, severance, gratuities, payment in lieu of notice, unused sick leave and unused rostered days off. Where one termination produces both, the excluded part is dealt with first against the ETP cap.
How much of a genuine redundancy payment is tax-free in 2026-27?
The tax-free limit is $13,598 plus $6,801 for each completed year of service. Only completed years count — part years do not. For example, 5 completed years gives $47,603 and 10 completed years gives $81,608. Only the amount above the limit is an ETP; a payment at or below the limit is not an ETP at all.
How is my preservation age worked out, and why does 30 June matter?
Your preservation age depends on your birth date: 55 if born before 1 July 1960, 56 for 1 July 1960 to 30 June 1961, 57 for 1 July 1961 to 30 June 1962, 58 for 1 July 1962 to 30 June 1963, 59 for 1 July 1963 to 30 June 1964, and 60 if born after 30 June 1964. The age test is whether you have reached your preservation age by 30 June of the income year you receive the payment — not your age on the payment date. Someone aged 59 when paid who turns 60 before 30 June is in the 17% band, not the 32% band.
Is unused annual leave or long service leave an ETP?
No. Unused annual leave and long service leave are taxed separately under ATO Schedule 7, not as ETPs. Use the Leave Payout Calculator for those amounts.
Can I roll my ETP over into super?
No. An ETP cannot be rolled over to superannuation. You may still make a personal contribution from the money afterwards, subject to contribution caps, but that is a separate step this guide does not calculate.
What happens if my ETP is paid more than 12 months after I leave?
An ETP must generally be paid within 12 months of termination to receive concessional treatment. A payment outside 12 months is a delayed termination payment, assessable at marginal rates rather than the concessional ETP rates. The 12-month rule does not apply to the taxable component of genuine redundancy payments and early retirement scheme payments.
Is the figure on this page the final tax I will pay?
No. The figures in this guide are PAYG withholding estimates for 2026-27, assuming you are an Australian resident who has provided a tax file number and pays the standard Medicare levy. Your final tax is settled when you lodge your return and can differ because of other income, offsets, HELP or STSL debts, and Medicare levy variations.
Sources
- ATO — Schedule 11, Tax table for employment termination payments (applies to payments made from 1 July 2026; caps, rates, ordering, 12-month rule)
- Australian Taxation Office — Employment termination payments for employees (named source, no link)
- Australian Taxation Office — How ETP components are taxed, including the 12-month rule (named source, no link)
- Australian Taxation Office — Genuine redundancy payments (named source, no link)
Related tools
Related guides
General information and estimates only, based on Australian Taxation Office guidance for 2026-27 — not tax advice. This guide explains PAYG withholding estimates, assuming you are an Australian resident who has provided a tax file number and pays the standard Medicare levy. Your final tax is settled when you lodge your return and can differ because of other income, offsets, HELP or STSL debts, and Medicare levy variations. If your payment summary shows an ETP code, a tax-free component, or a death benefit, check it against the ATO guidance or a registered tax agent before relying on this estimate.