Eligible Termination Payments and Superannuation: Australian Employer Guide

Employee exits are part of running a business - whether it’s a resignation, redundancy or a negotiated exit. Getting the final pay right matters, and that often means dealing with Eligible Termination Payments (ETPs) and understanding how they interact with superannuation.

If you’re unsure which payments count as ETPs, what to withhold for tax, or when superannuation applies, you’re not alone. In this guide, we’ll break it down in plain English so you can process terminations confidently and compliantly in Australia.

We’ll cover common scenarios, tax treatment, timing rules and the key documents you should have in place to reduce risk. Let’s get you set up to handle the legal and payroll details the right way.

What Are Eligible Termination Payments (ETPs)?

An Eligible Termination Payment is a lump sum paid to an employee because their employment has ended. Not every payment at termination is an ETP - some are taxed differently, and some attract superannuation while others don’t. Classifying each component correctly is the first step.

Typical Payments That Are ETPs

• Gratuities or “golden handshakes” for past service.
• Compensation for loss of office (e.g. payments under a deed to resolve a termination dispute).
• Payment in lieu of notice (PILON) if you choose to end employment immediately and pay the notice instead of having it worked.
• The taxable component of a genuine redundancy or early retirement scheme that exceeds the tax‑free threshold (explained below).
• Certain disability/invalidity payments related to permanent incapacity (subject to specific rules).

Payments That Are Not ETPs

• Accrued but unused annual leave and long service leave - these are termination leave payments with their own tax rules (not ETPs).
• Ordinary wages or salary for time worked up to the final day.
• Superannuation benefits paid from a fund (super is a separate system; a fund’s lump sum is not an employer ETP).
• The tax‑free component of a genuine redundancy or early retirement scheme (that portion is specifically tax‑free and not treated as an ETP).

A practical way to think about it: if the payment compensates the employee for the job ending (rather than paying for leave or hours worked), it may be an ETP.

Genuine Redundancy and Early Retirement Schemes

When a role is genuinely redundant or part of an approved early retirement scheme, there is often a tax‑free component calculated using a base amount plus an amount per completed year of service (indexed each year). Any amount above that tax‑free limit is an ETP and taxed at concessional rates up to the ETP cap. The details matter here, so build redundancy decisions on fair process and clear evidence that the role is no longer required.

How Do ETPs Interact With Superannuation?

Most ETPs don’t attract superannuation guarantee (SG) because they’re not “Ordinary Time Earnings” (OTE). The ATO’s view is that OTE generally covers what an employee earns for ordinary hours - not lump sums for ending employment.

As a result, common ETPs such as gratuities, compensation for loss of office, and the taxable part of a redundancy payment above the tax‑free threshold do not require SG. Accrued leave paid on termination is also not OTE, so no SG generally applies to those leave payouts.

Payment in lieu of notice is a common grey area in practice. The prevailing position is that PILON is not OTE and therefore SG is not payable, however you should still confirm treatment against your instrument (award/enterprise agreement), payroll system settings and current ATO guidance. For a deeper dive into this specific scenario, see payment in lieu of notice and superannuation.

If you’re deciding whether a particular termination payment is OTE, it can help to revisit the definition of ordinary time earnings and how the superannuation guarantee applies to different components of pay. A quick refresher on ordinary time earnings can save you from over‑ or under‑paying SG.

Employers sometimes ask whether an ETP can be paid into an employee’s super fund. An employee may choose to contribute post‑tax amounts to their super personally (subject to fund rules and contribution caps), but from the employer’s perspective you still need to classify, withhold and report the payment correctly as an ETP. Any request to direct payments to super should be checked with your payroll and tax advisers first.

Helpful reads:

• Payment In Lieu Of Notice And Superannuation
• Ordinary Time Earnings (OTE)
• Do You Pay Super On Termination Payments?

Calculating And Processing ETPs: Employer Steps

A clean process protects your business and helps your former employee understand the amounts paid and the tax outcome. Here’s a practical workflow you can follow.

1) Identify All Termination Components

Start by listing each item that will be paid:

• Final ordinary hours or salary
• Accrued annual leave and long service leave
• Payment in lieu of notice
• Redundancy or early retirement amounts
• Any agreed settlement amounts (e.g. under a deed)
• Outstanding allowances, commissions or bonuses

Classify each item as “not ETP” (e.g. leave), “ETP” (e.g. golden handshake), or “ordinary earnings” (e.g. hours worked up to the end date). If you’re unsure, get advice before processing.

2) Check Tax, Caps And Eligibility

ETPs are subject to concessional tax rates up to the ETP cap (indexed annually). Above the cap, higher rates apply. If it’s a genuine redundancy or early retirement scheme, work out any tax‑free amount first; any excess may be an ETP. Timing also matters - broadly, to qualify as an ETP it must be paid within 12 months of termination (with limited exceptions).

3) Calculate Final Pay

Final pay includes ordinary wages up to the last day, any applicable allowances, and leave entitlements. These are not ETPs and they have their own tax treatment. If you need a refresher on the full checklist, it’s worth revisiting calculating final pay for employees to ensure nothing is overlooked.

4) Process PAYG Withholding And STP Reporting

For ETP components, apply the correct withholding rates and report through Single Touch Payroll (STP) using the correct ETP type code (for example, different codes may apply to a redundancy excess versus other ETPs). For non‑ETP components, apply the usual PAYG and STP rules for wages and leave payouts. Your payroll software should support separate lines for each component.

5) Pay Superannuation Where Required (And Only Where Required)

Pay SG on OTE components only. Do not pay SG on ETPs or on termination leave payouts unless your instrument or an agreement specifically requires it (uncommon). Keep documentation showing how you determined SG treatment in case of audit.

6) Issue The Right Employee Documents

Provide the employee with payslips or a statement that clearly shows each component, withholding, and super. For ETPs, ensure the correct STP reporting has occurred and that the employee can see the classification. If you’re formalising a settlement, use a tailored Deed (discussed further below) and ensure the amounts align with payroll processing.

7) Keep Clear Records

Retain the termination letter, calculation worksheets, payroll reports, any redundancy selection notes, and any Deed or correspondence that explains the basis of payments. This evidence supports your classifications and tax treatment if questioned later.

Related resources:

• Calculating Final Pay For Employees
• How To Calculate A Redundancy Payment

Tax Treatment, Caps And Timing Rules

While the exact rates change over time, a few principles will help you stay on track.

ETP Cap (Indexed Annually)

• Concessional tax applies to ETPs up to the ETP cap for the year (this figure is indexed annually).
• Amounts above the ETP cap are taxed at a higher rate - your payroll system must withhold accordingly.

Genuine Redundancy And Early Retirement: Tax‑Free Component

• There’s a tax‑free threshold calculated using a base amount plus an amount per completed year of service (indexed). That portion is not an ETP.
• Any amount paid above the tax‑free threshold generally becomes an ETP and is taxed under the ETP rules.
• To access the tax‑free component, the role must be genuinely redundant or part of an approved early retirement scheme - document your process and decision‑making.

12‑Month Rule

• ETPs generally must be paid within 12 months of termination to access concessional ETP tax treatment.
• If paid after 12 months (without an exception), the concessional ETP rates may not apply, leading to higher withholding.

Invalidity/Disability Payments

• Certain payments due to permanent incapacity are treated differently. If this arises, get specific advice and keep supporting medical evidence on file.

Because ETP taxation is time‑sensitive and classification‑driven, it’s smart to run a second set of eyes over complex exits, especially where multiple components (e.g. redundancy, PILON and deed settlement) are involved.

Common Scenarios And Pitfalls

Resignation With Immediate Release

If an employee resigns and you choose to release them immediately, a payment in lieu of notice is common. Classify PILON correctly, treat it as an ETP for tax purposes, and consider whether any restraint, confidentiality and IP reminders should be included in your exit process. Many employers also confirm post‑employment obligations in writing.

Genuine Redundancy

Ensure the role is genuinely no longer required. Pay the redundancy entitlement under the applicable instrument, calculate the tax‑free threshold, then treat any excess as an ETP. Avoid “re‑labelling” a performance termination as redundancy - it risks disputes and penalties. If the employee is temporarily absent due to illness or on leave, be careful: redundancy timing and consultation can be sensitive.

Mutual Separation With A Deed

Where both parties agree to end employment on negotiated terms, a settlement amount under a Deed is common. Typically, settlement sums are ETPs. Use a tailored Deed that resolves claims, deals with confidentiality and restraints, and clearly sets out the payment components for payroll to process correctly.

Misconduct Dismissal

Serious misconduct may end employment without notice, but you still need to pay any accrued but unused leave. A misconduct termination does not create a redundancy entitlement, and you should be extra careful about process and documentation if any settlement is contemplated.

Probation And Short Service

Short tenure doesn’t remove your obligations. You’ll still need to pay wages to the termination date and any accrued leave. If you opt to pay notice instead of having it worked, the same PILON classification and tax rules apply.

What Documents Should You Have In Place?

Clear, up‑to‑date documents make terminations smoother and reduce the risk of disputes. Consider the following staples.

• Employment Contract: Sets out notice, redundancy, bonus rules, post‑employment restraints, confidentiality, and IP. A well‑drafted contract makes classification of payments far simpler at exit.
• Workplace Policies: Policies around performance, conduct, redundancy and consultation keep your process fair and consistent (and can help defend decisions).
• Termination Documents Suite: Template letters for notice, termination, redundancy and settlement help you act consistently and on time. Many employers adopt an Employee Termination Documents Suite so HR isn’t drafting from scratch under pressure.
• Deed Of Release And Settlement: Used for negotiated exits to finalise claims, confirm confidentiality, and set out ETP components clearly for payroll. A tailored Deed Of Settlement reduces legal risk.
• Redundancy Toolkit: For restructures, use a standard process (business case, consultation notes, selection matrix, notice, and payment calculation). Cross‑check entitlements against your award or enterprise agreement as well as the National Employment Standards.

It’s also helpful to maintain a termination checklist that aligns HR steps (consultation, letters, property return, IT off‑boarding) with payroll steps (classification, withholding, STP reporting and super).

Frequently Asked Questions: ETPs And Super

Is Superannuation Payable On ETPs?

Generally, no. ETPs are not OTE, so SG isn’t payable. The same applies to unused annual leave and long service leave paid on termination. Double‑check grey areas like PILON against your instrument and current ATO positions, and see the guidance on whether you pay superannuation on termination payments if you need a quick reference.

Are Redundancy Payments ETPs?

Partly. The tax‑free component of a genuine redundancy or early retirement scheme is not an ETP. Any amount above that tax‑free limit is typically an ETP and taxed at concessional rates up to the ETP cap.

How Quickly Do I Need To Pay An ETP?

ETPs generally need to be paid within 12 months of the termination date to access concessional ETP rates. Processing promptly is your safest path, especially where multiple components are involved.

What Should Be In The Employee’s Final Statement?

Show each component separately (wages, leave payouts, ETPs), the tax withheld for each, and any super paid on OTE items only. Ensure your STP reporting uses the correct categories and ETP codes.

Key Takeaways

• Not every termination payment is an ETP - classify each component (wages, leave, PILON, redundancy, settlement) before you process payroll.
• Most ETPs and termination leave payouts are not OTE, so superannuation guarantee generally doesn’t apply; pay SG only on OTE components.
• Genuine redundancy and early retirement have a tax‑free component; any excess is an ETP taxed up to the ETP cap, and the 12‑month timing rule matters.
• Use a clear workflow: identify components, apply tax rules, process PAYG/STP correctly with ETP codes, and keep strong records.
• Have the right documents ready - Employment Contracts, a Termination Documents Suite and, where needed, a Deed Of Settlement - to reduce disputes and make payroll treatment clear.
• When in doubt on classification or super, check the OTE definition, current ATO guidance and your industrial instrument, or get advice before you pay.

If you’d like a consultation on handling Eligible Termination Payments and superannuation for your team, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.