Employment termination payments – lifetime cap

Generally, an employer is required to pay an ETP to an employee upon termination of their employment.

The taxation of an ETP will depend on the type of payment, the employee’s age and length of employment.

All ETPs are subject to an annually indexed cap which is a lifetime cap.

Concessional tax treatment is applied to the portion of the ETP that does not exceed the lifetime cap. Any amount over the lifetime cap will be taxed at the highest marginal tax rate.

For the 2014/15 income year, the lifetime ETP cap is $185,000.

Where an ETP cap is wholly or partially used up in a particular year, the unused or nil balance will increase each year by the yearly cap increment.

For example, consider a taxpayer who has depleted their ETP cap of $180,000 in the 2013/14 income year and receives another ETP payment in a future year, where the cap is $200,000. The first $20,000 of the new ETP will be eligible for the concessional tax treatment before the highest marginal tax rate is applied to the remaining payment.

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