Employee termination payment tax is the tax you pay on a lump sum such as a redundancy payment, golden handshake or payment in lieu of notice when your job ends. The taxable part of an employment termination payment (ETP) is taxed at a concessional 17% if you have reached your preservation age, or 32% if you have not, up to a cap. Anything above the cap is taxed at 47%.
For the 2026-27 income year the ETP cap is $270,000. If you are made genuinely redundant, part of your payment is tax-free: $13,598 plus $6,801 for each complete year of service.
Below we explain how employee termination payment tax works, what counts as an ETP, which cap applies to you, how unused leave is treated, and we work through two examples step by step.
Key takeaways
- The taxable part of an ETP is taxed at 17% (preservation age or older) or 32% (under preservation age), up to the relevant cap. Both rates include the Medicare levy.
- The ETP cap is $270,000 for 2026-27 ($260,000 for 2025-26). Amounts above the cap are taxed at 47%.
- Golden handshakes, notice pay and unused sick leave are also limited by the $180,000 whole-of-income cap, which shrinks with your other income for the year.
- A genuine redundancy payment is tax-free up to $13,598 + $6,801 per complete year of service in 2026-27.
- Unused annual leave and long service leave are not part of the ETP and are taxed separately.
What are the ETP tax rates and caps at a glance?
| Item | 2025-26 | 2026-27 |
|---|---|---|
| ETP cap | $260,000 | $270,000 |
| Whole-of-income cap (not indexed) | $180,000 | $180,000 |
| Genuine redundancy tax-free base amount | $13,100 | $13,598 |
| Tax-free amount per complete year of service | $6,552 | $6,801 |
| Rate up to the cap, preservation age or older | 17% | 17% |
| Rate up to the cap, under preservation age | 32% | 32% |
| Rate above the cap | 47% | 47% |
Figures for employee termination payment tax come from the ATO’s ETP rates and thresholds and How ETP components are taxed.
What counts as an employment termination payment?
An ETP is a lump sum you receive because your employment ended. According to the ATO, ETPs include:
- payments for unused sick leave or rostered days off
- payments in lieu of notice
- gratuities or golden handshakes
- compensation for loss of job or wrongful dismissal
- invalidity payments for permanent disability
- genuine redundancy or early retirement scheme payments above the tax-free limit
- certain payments made after an employee’s death.
These are not ETPs: lump sums for unused annual leave or long service leave, the tax-free part of a genuine redundancy or early retirement payment, super benefits and foreign termination payments. You also can’t roll an ETP over into super (see the ATO’s guide to ETPs for employees).
How is employee termination payment tax worked out?
To work out employee termination payment tax, your ETP is split into two components.
- Tax-free component: any invalidity segment and any pre-1 July 1983 segment. It isn’t taxed and you don’t include it in your tax return.
- Taxable component: the rest of the ETP. It is taxed at a concessional rate up to the relevant cap, and at the top rate above it.
The concessional rate depends on your age at the end of the income year:
- 17% if you have reached your preservation age (60 for anyone born after 30 June 1964)
- 32% if you are under preservation age
- 47% on any amount above the cap, whatever your age.
Each rate includes the 2% Medicare levy. Your employer withholds tax at these rates under the ATO’s Schedule 11 ETP tax table, and the payment appears on your income statement in myGov.
Which cap applies: the ETP cap or the whole-of-income cap?
Which cap applies to your employee termination payment tax depends on the type of payment.
- Excluded payments (code R) only use the ETP cap. These are genuine redundancy amounts above the tax-free limit, early retirement scheme payments, invalidity payments and compensation for personal injury, unfair dismissal, harassment or discrimination.
- Non-excluded payments (code O) use the smaller of the ETP cap and the whole-of-income cap. These include golden handshakes, non-genuine redundancy payments, notice pay, gratuities and unused sick leave or rostered days off.
The whole-of-income cap is $180,000 and is not indexed. It is reduced by your other taxable income in the same income year, such as salary and wages. So if you earned $120,000 in salary before you left, only $60,000 of a code O payment gets the concessional rate.
Watch out
If you leave late in the financial year after a high salary, the whole-of-income cap can be very small, or nil. A golden handshake paid then may be taxed mostly at 47%. Employee termination payment tax is very sensitive to timing, so get advice before you agree to an exit date.
How much of a genuine redundancy payment is tax-free?
If your redundancy is genuine, part of the payment is tax-free and is not part of the ETP. For 2026-27 the limit is $13,598 plus $6,801 for each complete year of service. Anything above that limit is an ETP (code R) and is taxed under the ETP cap.
Under the ATO’s redundancy rules, a redundancy is genuine when:
- your employer decided the job no longer exists and dismissed you
- you were dismissed, rather than choosing to resign
- you were dismissed before your age-pension age (67 for anyone born on or after 1 January 1957)
- you were not dismissed simply because you reached normal retirement age.
How is unused leave taxed when you leave?
Unused annual leave and long service leave are paid as separate lump sums, not as part of the ETP. Under the ATO’s Schedule 7:
- On genuine redundancy, invalidity or an early retirement scheme, unused annual leave and most long service leave is taxed at 32%.
- On a normal resignation, leave built up after 17 August 1993 is added to your salary and taxed at your marginal rate.
- Long service leave built up before 16 August 1978 is only 5% assessable.
What is the 12-month rule for ETPs?
A payment generally has to be made within 12 months of your termination to count as an ETP. If it is paid later, it is usually taxed as ordinary income at your marginal rate, unless the ATO agrees otherwise. Amounts above the tax-free limit on a genuine redundancy are an exception and stay ETPs even if paid after 12 months.
Worked example: employee termination payment tax on a redundancy
The facts
Sam is 52, so under preservation age. He is made genuinely redundant after 12 complete years of service and receives a $150,000 redundancy payment, not counting unused leave. We compare the 2025-26 limits (if he had been paid by 30 June 2026) with the 2026-27 limits (paid now).
Old limits: paid in 2025-26
- Tax-free amount: $13,100 + ($6,552 × 12) = $13,100 + $78,624 = $91,724
- ETP (taxable component): $150,000 − $91,724 = $58,276
- The ETP is well under the $260,000 ETP cap, so it is all taxed at 32%
- Tax: $58,276 × 32% = $18,648.32
- Sam keeps: $150,000 − $18,648.32 = $131,351.68
New limits: paid in 2026-27
- Tax-free amount: $13,598 + ($6,801 × 12) = $13,598 + $81,612 = $95,210
- ETP (taxable component): $150,000 − $95,210 = $54,790
- The ETP is well under the $270,000 ETP cap, so it is all taxed at 32%
- Tax: $54,790 × 32% = $17,532.80
- Sam keeps: $150,000 − $17,532.80 = $132,467.20
Because the tax-free limits are indexed, the same payment attracts $1,115.52 less tax in 2026-27 ($18,648.32 − $17,532.80).
A golden handshake with the whole-of-income cap
Priya is 61, so over preservation age. She resigns in 2026-27 and receives a $100,000 golden handshake (code O). She has already earned $120,000 in salary this income year.
- Whole-of-income cap: $180,000 − $120,000 = $60,000
- Cap that applies: the smaller of $270,000 and $60,000 = $60,000
- Tax up to the cap: $60,000 × 17% = $10,200
- Tax above the cap: ($100,000 − $60,000) × 47% = $40,000 × 47% = $18,800
- Total tax on the ETP: $10,200 + $18,800 = $29,000
Tip
Check the ETP code on your income statement before you lodge. If a genuine redundancy has been coded O instead of R, you may be taxed under the lower whole-of-income cap. You can estimate your overall result with our tax refund calculator.
How do you report an ETP in your tax return?
Your employer reports the ETP and the employee termination payment tax withheld through Single Touch Payroll, and it pre-fills in your individual tax return. Check the amount, tax withheld and code against what you were paid. The tax-free part of a genuine redundancy is not included in the ETP. The ATO’s myTax ETP instructions explain each label.
If you are near retirement, think about how the payment fits with your super. You can’t roll an ETP into super, but you may be able to make a personal contribution from it within the contribution caps. See our guides on how to contribute to super and transition to retirement. If an ETP is paid after a death, our guide to death benefit tax covers related rules.
Frequently asked questions
How much tax do you pay on an employment termination payment?
Employee termination payment tax applies to the taxable part of an ETP. It is taxed at 17% if you have reached your preservation age, or 32% if you have not, up to the relevant cap. Anything above the cap is taxed at 47%. These rates include the Medicare levy.
What is the ETP cap for 2026-27?
The ETP cap is $270,000 for the 2026-27 income year, up from $260,000 in 2025-26. It is indexed each year.
Is a redundancy payment tax-free in Australia?
Part of a genuine redundancy payment is tax-free. For 2026-27 the tax-free limit is $13,598 plus $6,801 for each complete year of service. Any amount above that is an ETP and is taxed at the concessional ETP rates up to the ETP cap.
Is unused annual leave part of an ETP?
No. Lump sums for unused annual leave and long service leave are not ETPs. They are reported separately and taxed under their own rules, which depend on why you left and when the leave was built up.
Can I roll my ETP into super?
No. You can’t roll over an ETP into super. You may be able to make a personal super contribution from the money, but the contribution caps apply.
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Talk to a registered tax agent
Received a redundancy or termination payment and want to check your employee termination payment tax is right? Speak with a registered tax agent at Nanak Accountants & Associates on 1300 626 258, or book a consultation with our team. We prepare individual tax returns for employees across Australia.
This article is general information only and is not personal financial or tax advice. Information checked against ATO sources on 22 October 2026.
