When employment ends, understanding the financial and tax implications of a redundancy or an ETP payment (Employment Termination Payment) is important. Both terms often cause confusion, yet they have distinct meanings and tax treatments. Let’s dive into this article to see how we break down the differences and explore the tax-free components.
What Is a Redundancy Payment?
A redundancy occurs when an employee’s position is no longer required due to restructuring, downsizing, or closure. Genuine redundancy payments are taxed differently from other termination payments, as they often include a tax-free component based on the employee’s years of service.
The tax-free component is calculated using the following formula:
- Base Amount (set annually by the ATO) + (Years of Service × Service Amount)
For the 2024 financial year, the base amount is $11,985, and the service amount is $5,994.
Example:
If an employee with 10 years of service is made redundant:
- Tax-Free Component = $11,985 + (10 × $5,994) = $71,925
This amount is tax-free, with the excess taxed as part of an ETP.
What Is an ETP Payment?
An ETP payment refers to amounts paid upon termination of employment, excluding redundancy payments. It includes unused leave, gratuities, and golden handshakes. Unlike redundancy payments, ETPs have a concessional tax treatment but are subject to caps.
ETP payments fall into two categories:
- Concessional Taxable Component: Taxed at a lower rate, depending on the employee’s age and the applicable cap.
- Excess Component: Taxed at the individual’s marginal tax rate.
Tax Implications of ETP Payments
The concessional tax rates for the ETP payment depend on the recipient’s age:
- Under preservation age: 32% tax on amounts up to the cap
- Over preservation age: 17% tax on amounts up to the cap
The cap for the 2024 financial year is $235,000.
Example:
An employee under preservation age receives a $50,000 ETP payment:
- Taxable Portion = $50,000
- Tax Payable = $50,000 × 32% = $16,000
*visit the ATO for latest updates*
Preservation Age
The preservation age is the minimum age at which an individual can access their superannuation savings under Australian law. This age impacts the tax rates applied to ETPs.
| Date of Birth | Preservation Age |
| Before 1/7/1960 | 55 |
| 1/7/1960–30/6/1961 | 56 |
| 1/7/1961–30/6/1962 | 57 |
| 1/7/1962–30/6/1963 | 58 |
| 1/7/1963–30/6/1964 | 59 |
| After 30/6/1964 | 60 |
Employees who are at or above their preservation age receive more favorable tax treatment on ETPs, such as lower concessional tax rates.
Redundancy vs ETP: What’s the Difference?
- Nature: Redundancy applies to positions no longer required due to business reasons, while ETPs cover additional payments like unused leave/RDO , payments in lieu, unfair dismissal etc.
- Tax-Free Component: Genuine redundancy payment has a tax-free component, reducing tax liability.
- Tax Treatment: ETPs are taxed at concessional rates within caps, whereas redundancy payment may include a larger tax-free component.
To Wrap Up
Understanding redundancy payment and ETP payment ensures compliance and maximises financial outcomes. By calculating the tax-free component and recognising the concessional tax rates for ETPs, both employers and employees can navigate these payments confidently.
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Read More:
A Guide to ETP (Employment Termination Payments)
How to Go About Marginal Tax Rates for Lump Sum?
