Termination Payment Basics

A final pay looks like one number hitting a bank account, but tax law slices it into components that are each taxed and reported differently. Getting a termination payment wrong is doubly painful: the departing employee's tax position is affected, and the employer's payroll reporting has to be amended after the person has already left.

The pieces of a termination payment

• Ordinary wages up to the last day, taxed and reported as normal.
• Unused annual leave, and unused long service leave where it applies.
• A genuine redundancy payment, where the role itself is being abolished.
• An employment termination payment (ETP) — for example payment in lieu of notice, an ex gratia amount, or certain unused sick leave payouts.

How each component is taxed

Unused leave is not simply added to the final week's wages. It is withheld under dedicated schedules for unused leave payments, and where the leave is being paid out because of a genuine redundancy, a concessional flat withholding rate applies — check the current ATO schedule when processing. Leave accrued in certain earlier periods also carries its own treatment.

A genuine redundancy payment is tax-free up to a limit made up of a base amount plus an additional amount for each completed year of service; both are indexed annually, so check the current ATO figures rather than relying on last year's. Anything above the tax-free limit becomes an ETP. Genuine redundancy treatment is generally not available once the employee has reached age-pension age, and the dismissal must genuinely be about the position disappearing, not the person.

ETPs receive concessional withholding only up to the ETP cap, which is indexed each year, and some ETP types are also tested against the whole-of-income cap of $180,000 — check the current ATO figures before processing. An ETP generally has to be paid within 12 months of termination to keep concessional treatment.

The reporting employers must get right

Termination components go through Single Touch Payroll under their own labels — unused leave at the correct lump sum labels, ETPs with the correct type code and payment date — not folded into ordinary gross wages. Those labels drive the employee's prefill and their own tax return, so a mislabelled final pay usually surfaces months later as a confused former employee and an amended pay event.

What we commonly see go wrong: payments in lieu of notice reported as ordinary wages, redundancy treatment claimed for a resignation or for a role that was immediately refilled, the tax-free limit applied using outdated figures, and super treated inconsistently across the components.

When to get advice

Terminations are low-frequency, high-stakes payroll events — most small businesses process one rarely enough that the rules have changed since last time. Having the calculation and the STP labels checked before the payment is made is far cheaper than unwinding it afterwards, particularly for redundancies where the tax-free limit and ETP caps interact.

Is a redundancy payment always tax-free?

No. Only a genuine redundancy — where the position itself is abolished — qualifies, the tax-free amount is capped by a service-based limit that is indexed each year, and conditions such as the employee's age apply. Amounts above the limit are taxed as an ETP.

Do I pay super on termination payments?

Generally, super guarantee applies to ordinary time earnings, and most lump sums paid on termination — such as unused leave paid out — fall outside that base. The components need to be looked at individually, so check the current ATO guidance for the specific payment.

What exactly is an ETP?

An employment termination payment is a lump sum paid in consequence of ending employment, such as payment in lieu of notice or an ex gratia amount. It is taxed concessionally within caps and must be reported separately through STP with its own type code.