What Are Employment Termination Payments In Australia?

If you’re wrapping up someone’s employment - or leaving a role yourself - you’ll likely come across the term “employment termination payment” (ETP). Knowing exactly what an ETP is, how it’s different from “final pay”, what must be paid, and how tax and reporting work can help you avoid costly mistakes and disputes.

In Australia, there are two key frameworks at play when an employment ends. The Fair Work system (National Employment Standards, modern awards and enterprise agreements) sets minimum entitlements like notice, redundancy and leave payouts. Separately, the income tax law sets the tax treatment for certain lump sums that qualify as ETPs under the Income Tax Assessment Act 1997 (ITAA 1997). Keeping those two streams in sync is the trick.

In this guide, we’ll break down what counts as an ETP, what’s not an ETP, what goes into final pay, when payments should be made, how ETPs are taxed and reported, and which documents make the process smoother. Our goal is to help you handle terminations fairly, confidently and in full compliance.

What Is An Employment Termination Payment (ETP)?

An employment termination payment is a lump sum paid to an employee because their employment ends, and which meets the specific definition under Australia’s income tax laws (ITAA 1997). It’s primarily a tax concept - not everything you pay out at the end of employment is an ETP, and not every ETP is required by the Fair Work Act. Instead, the Fair Work rules determine what entitlements exist; the tax law determines how certain termination-related amounts are taxed and reported.

Common examples that often qualify as ETPs include:

• Payment in lieu of notice (where the employee isn’t required to work their notice period)
• Ex gratia or “golden handshake” amounts
• Compensation for loss of employment (for example, a lump sum to settle a dismissal dispute)
• Redundancy amounts above the tax‑free threshold for a genuine redundancy or early retirement scheme
• Some legacy items (e.g. certain unused sick leave paid out under older arrangements)

Importantly, ETPs are separate from “final pay” items such as ordinary wages to the last day worked and most statutory leave payouts. Those amounts are still required under the Fair Work system, but they are taxed differently and are reported separately to the ATO.

In practice, a termination can involve both: standard final pay items plus one or more ETP components. That’s why it’s essential to categorise each amount correctly.

What’s Included (And What Isn’t)?

The right mix of payments depends on the circumstances (resignation, redundancy, retirement, dismissal), the employment contract, and any applicable modern award or enterprise agreement. Here’s how the pieces usually fall:

Amounts That Commonly Form Part Of An ETP

• Payment in lieu of notice (if you end employment immediately and pay out the notice period). For practical guidance on this option, see payment in lieu of notice.
• Ex gratia or discretionary “thank you” payments (not linked to performance targets)
• Compensation for loss of employment (settlement sums or amounts for giving up claims)
• Genuine redundancy or early retirement amounts above the tax‑free limit (the tax‑free component itself is not an ETP)

Amounts That Are Usually Not An ETP (But Are Still Payable If Accrued)

• Wages and allowances up to the final day worked
• Accrued but unused annual leave (payout is required on termination)
• Accrued but unused long service leave (payout is required under state/territory laws)
• Superannuation (your normal employer super contributions aren’t ETPs)
• Genuine redundancy tax‑free portion (this has its own tax rules and sits outside the ETP regime)

Remember: whether an amount is payable at all is largely a Fair Work and contract question. How that payable amount is taxed is an income tax question. Keep those questions separate so you get both right.

Final Pay In Australia: What Must Be Paid, When And In Special Scenarios?

Final pay (sometimes called “last pay”) is everything an employee is owed on exit that isn’t an ETP. It typically includes all unpaid wages up to the termination date, any payable allowances, accrued annual leave, and any long service leave required under the relevant state or territory legislation.

To make this easier, many employers use a checklist or a standard approach. If you need a refresher, see the practical overview in calculating final pay, and if the exit involves a resignation, check the nuances in annual leave on resignation.

What Has To Be Paid?

• Outstanding wages for hours worked to the final day
• Accrued but unused annual leave (all employees)
• Accrued long service leave (as required under your state/territory laws)
• Any contractual commissions, incentives or allowances that have become payable
• Any redundancy pay required by the National Employment Standards (unless an exception applies)
• Any ETP items that arise due to the way employment ends (e.g. a notice payout, ex gratia or settlement sums)

When Should Final Pay And ETPs Be Paid?

There’s no single statutory deadline for every situation, but most awards and registered agreements require you to pay on the final day or “as soon as practicable” - often the next regular pay cycle. Even where there’s no specific rule, best practice is to finalise everything promptly (typically within 7 days) to minimise disputes and the risk of action by the Fair Work Ombudsman.

Where a redundancy is in play, timing also helps employees plan. If you’re assessing entitlements, our clients often cross-check with an estimator such as a redundancy calculator before instructing payroll.

Payments In Lieu Of Notice

If you decide not to have someone work out their notice, you’ll generally pay the equivalent amount instead. That “pay in lieu” is typically treated as an ETP for tax purposes and sits alongside wages and leave in the final pay run. If you’re weighing up options, see the detailed discussion in payment in lieu of notice.

Resignation Without Notice: Can You Deduct Anything?

Employers often ask whether they can deduct the “unworked notice” if someone quits without giving the required notice. Deductions are tightly regulated. They must be permitted by the applicable award/registered agreement or contract, be authorised in writing, and comply with the Fair Work Act (including the general limits on deductions). In many awards, any deduction is capped - commonly up to one week’s wages. Always check the specific instrument that applies before making any deduction, and document the basis clearly.

Serious Misconduct

For lawful dismissals due to serious misconduct, you generally don’t pay notice, but final pay for hours worked and any payable leave still apply. If there’s a risk of an unfair dismissal or general protections claim, consider careful process and documentation (for example, show‑cause steps) to manage risk before finalising payments.

Retirement

On retirement, the usual final pay items apply, plus any contractual retirement benefits. Depending on how they are structured, some retirement amounts may be ETPs (and taxed as such). Others (like normal superannuation) are outside the ETP rules.

Redundancy

Genuine redundancy involves specific steps and entitlements under the National Employment Standards. The redundancy payment itself has a tax‑free component (based on the employee’s years of service and an indexed base amount). Any amount above that tax‑free threshold is treated as an ETP. If you’re calculating entitlements, this step‑by‑step overview of how to calculate redundancy is a handy reference before you brief payroll.

Tax, Super And Reporting For ETPs

Tax treatment is where many termination payments go off the rails. A few principles will keep you on track:

How ETPs Are Taxed

• ETPs are taxed differently to ordinary earnings. The rate depends on the employee’s age, the type of ETP and whether the payment exceeds the annual ETP cap or whole‑of‑income cap.
• Genuine redundancy and early retirement scheme payments have a tax‑free component (outside the ETP system). Any excess above the tax‑free amount is usually an ETP.
• Amounts that are not ETPs (for example, unused annual leave and most long service leave payouts) have their own tax withholding rules.

Because the correct tax code depends on the purpose and category of each amount, it’s vital to label and process each component correctly in payroll.

Superannuation On Termination Payments

• Employer super contributions are generally not payable on ETPs.
• Payment in lieu of notice is typically not ordinary time earnings (OTE) for superannuation purposes. However, always confirm with your payroll adviser or accountant against current ATO guidance and the specific facts.
• Normal superannuation guarantee obligations still apply to ordinary earnings up to the termination date.

Single Touch Payroll (STP) Reporting

• Under STP Phase 2, ETPs are reported using the correct ETP codes and components. In most cases, you won’t issue a separate paper payment summary - you’ll report via STP.
• Ensure your payroll system is configured for termination categories so the right ETP code, date of payment and tax withheld are sent to the ATO.

Tip: The tax and STP settings are technical and change from time to time. It’s wise to get advice from your accountant or payroll specialist to confirm categorisation, withholding and reporting for your specific scenario.

Key Documents To Get Termination Right

Solid documentation makes terminations clearer and lowers the risk of disputes. The right bundle will depend on the situation, but these are commonly used:

• Employment Contract: Your starting point for notice periods, bonus or commission terms, and any entitlements triggered on exit.
• Employee Termination Documents Suite: Tailored letters and checklists that confirm end dates, reasons, and a breakdown of payments (including any ETP components).
• Deed of Termination: Useful for mutual separations or where you want a clean release of claims in exchange for an agreed payout (often used with senior roles or settlement sums).

Good paperwork also helps payroll and finance record the correct basis for each amount (e.g. which part is notice in lieu, which part is redundancy above the tax‑free limit, which part is annual leave), so tax and STP reporting line up with the legal position.

Key Takeaways

• ETPs are primarily a tax concept under the Income Tax Assessment Act 1997. Work out what’s payable under Fair Work first, then apply the correct tax treatment to each component.
• Final pay (wages to the last day, annual leave and long service leave) is separate from ETPs. Both may apply at the same time when employment ends.
• Pay termination amounts promptly - generally on the final day or the next regular pay cycle. Aim to finalise within a week to reduce risk and stress for everyone.
• Payment in lieu of notice, ex gratia sums, compensation for loss of employment and redundancy amounts above the tax‑free limit commonly fall into the ETP bucket.
• Deductions when an employee resigns without notice are strictly limited and often capped (frequently up to one week’s wages) - only deduct if permitted by the award/agreement or contract and compliant with the Fair Work Act.
• ETPs have special withholding rates and must be reported with the correct codes via STP. Super is generally not payable on ETPs; confirm the position for your case with your accountant.
• Clear paperwork helps. Use an Employment Contract as your baseline, back it up with an Employee Termination Documents Suite, and consider a Deed of Termination where you need certainty and release of claims.
• For practical calculations, check resources like calculating final pay, the nuances for annual leave on resignation, and how to approach redundancy calculations.

If you’d like a consultation on employment termination payments for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.