Eligible termination payments, your tax and super obligations as an employer

When an employee leaves, whether by resignation, redundancy, dismissal or a negotiated exit, the final payment is rarely a single amount. It is usually a bundle: wages up to the last day, accrued annual and long service leave, possibly a payment in lieu of notice, a redundancy amount or a settlement sum. Each component has its own tax treatment, its own reporting code and its own superannuation answer, and the employer is the one who has to get all of it right.

The obligation is simple to state and harder to execute. You must classify every component of the final payment correctly, withhold and report the right tax, pay superannuation guarantee only where the law requires it, and keep records that justify each decision. Get it wrong and the ATO can assess you for unpaid superannuation plus interest, pursue tax that should have been withheld from the payment, and leave your former employee with a tax bill that turns a clean exit into a dispute. This guide sets out the four duties that attach to every termination payment, what happens if you miss them, and where you need help.

Who must comply and when the obligation bites

These duties apply to every employer in Australia that pays a worker because their employment has ended. There is no size threshold: a business with one part-time employee owes the same PAYG withholding and superannuation guarantee obligations as a large employer. The trigger is not the reason for leaving, it is the payment itself. If you pay an amount in consequence of the termination of employment, it is an employment termination payment (ETP) unless a specific exclusion applies, under Division 82 of the Income Tax Assessment Act 1997 (Cth).

The common triggers are:

Resignation or retirement: final wages, accrued leave and any payment in lieu of notice.
Genuine or non-genuine redundancy: severance amounts, notice, and any excess over the tax-free limit.
Dismissal: including summary dismissal for serious misconduct, where accrued leave still must be paid.
Mutual separation: a settlement amount under a deed of release.
Contract expiry or cessation of a fixed-term engagement.
Death of an employee: death benefit termination payments to dependants.

Whether the worker was full time, part time, casual or fixed term, the classification duty attaches to payments made because the job ended. The first question is never who the worker was, but what the payment is actually for.

Classify every component of the final payment

Classification is the duty everything else hangs on. The ATO treats these as ETPs: amounts in lieu of notice, a gratuity or golden handshake, amounts for unused rostered days off, an invalidity payment for permanent disability (other than compensation for personal injury), and the part of a genuine redundancy or early retirement scheme payment above the tax-free limit.

The payments that are not ETPs are just as important:

Unused annual leave and long service leave: these are not ETPs when paid out on termination. They are separately recorded as unused leave payments and have their own withholding rules.
The tax-free part of a genuine redundancy or early retirement scheme payment: this is not an ETP.
Ordinary wages and allowances: amounts for work done up to the final day are not ETPs.
Payments made in lieu of superannuation benefits: these are not ETPs.

A practical test that usually works: if the payment compensates the employee for the job ending, it may be an ETP. If it pays for time worked or leave accrued, it is not. Compensation for personal injury, unfair dismissal, harassment or discrimination receives special treatment, and so does an invalidity component, so flag those for advice rather than assuming.

Apply the right tax treatment

Once you know what each component is, you apply the tax rules for that category. Three rules drive most of the work.

The ETP cap and concessional rates

The taxable component of an ETP is taxed concessionally up to the ETP cap, which is indexed annually. For 2026-27 the cap is $270,000, up from $260,000 in 2025-26. The ATO's ETP rates page sets out the current figure.

Up to the cap, the concessional rate is 17% if the employee has reached preservation age, and 32% if they have not. Both figures include the Medicare levy.
Any amount over the cap is taxed at the top marginal rate of 45% plus the 2% Medicare levy.
For most ETPs, including golden handshakes, payment in lieu of notice and non-genuine redundancy payments, a separate whole-of-income cap of $180,000 also applies. That cap is not indexed and is reduced by the employee's other taxable income for the year, so the effective limit is often lower than the ETP cap.

You do not need to rebuild this calculation yourself for every exit. The ATO's Schedule 11 tax table for ETPs builds the caps in and tells you what to withhold, but only if the payment has been classified correctly in the first place.

Genuine redundancy and early retirement tax-free amounts

A genuine redundancy payment is tax free up to a limit based on the employee's complete years of service: a base amount plus an amount per year. For 2026-27 the base is $13,598 plus $6,801 for each complete year of service, indexed each year from the previous year's $13,100 and $6,552. The ATO's genuine redundancy page sets out the conditions.

To access it, the role must genuinely be abolished and the employee must be under age pension age. The tax-free part is not an ETP and is reported separately as lump sum D. Any amount above the limit becomes an ETP, taxed under the ETP rules. Payments for voluntary resignation, dismissal for disciplinary or inefficiency reasons, or reaching normal retirement age do not qualify, and the whole payment is treated as a non-genuine redundancy ETP. Never relabel a performance dismissal as redundancy to reach the tax-free amount. The ATO and, on the employment side, the Fair Work Commission can both look behind the label.

The 12-month rule

An ETP must generally be paid within 12 months of termination to receive concessional treatment, under the ATO's 12-month rule. A payment made after that window is included in the employee's assessable income and taxed at marginal rates, which is a materially worse outcome for them and a dispute waiting to happen for you.

There are exceptions. The rule does not apply to the taxable component of genuine redundancy and early retirement scheme payments. The ATO has also made legislative determinations covering payments delayed by legal action begun within 12 months of termination, payments from a liquidator, receiver or trustee in bankruptcy appointed within that window, and some redundancy trust payments. In other cases the ATO can exempt a late payment if you write to them with the details. If a settlement is going to be paid more than a year after the exit, check the timing before you commit to a figure.

Withhold and report through PAYG and STP

Withholding is where classification errors turn into real money. Use the ATO's Schedule 11 tax table for ETPs and Schedule 7 for unused leave payments on termination, and make sure your payroll system treats each component on its own line rather than blending everything into one payment.

Reporting through Single Touch Payroll (STP) has its own requirements when an employee leaves:

Report the cessation date and a cessation reason code, such as V for voluntary cessation, R for redundancy, F for dismissal, C for contract cessation or I for ill health.
Report unused leave paid on termination as paid leave type U, with lump sum codes A, B or D where they apply. Lump sum D is the tax-free part of a genuine redundancy.
Report ETPs by payment date and type rather than as year-to-date amounts, splitting the taxable and non-taxable components and the amount withheld. ETP type R covers genuine redundancy excesses, invalidity and some compensation payments; type O covers other reasons; type S covers split payments across financial years.

The ATO's guidance on employees transferring or leaving sets out the full code list. If your payroll provider handles STP, make sure the person running the final pay run knows which codes apply to which component, because the codes are the ATO's main check on your classification.

Pay superannuation only where it is due

The superannuation guarantee (SG) question is where employers most often overpay or underpay. The rate is 12% of ordinary time earnings, and since 1 July 2026 the Payday Super regime requires you to pay SG with each pay cycle and have the contribution reach the fund within seven business days of payday.

The key point for terminations is what counts as earnings. The ATO's guidance for when a worker leaves is explicit: ETPs and unused leave payments do not form part of an employee's ordinary time earnings, or of qualifying earnings from 1 July 2026, so no SG is payable on them. That covers golden handshakes, compensation for loss of office, redundancy excesses and accrued annual and long service leave paid out at the end.

What does attract SG is the final wages for ordinary hours worked up to the termination date, plus any other component that counts as ordinary time earnings or qualifying earnings. Payment in lieu of notice is treated by the ATO as an ETP, so it does not attract SG under the ATO's position, but confirm the position against your award, enterprise agreement or contract, because an instrument can require more than the ATO minimum. If you do pay super on a component, or deliberately do not, record the reasoning. The seven-business-day clock also applies to the final pay run, so schedule the last SG payment rather than leaving it for the next quarter.

The consequences of getting it wrong

The costs of error are concrete. If SG is not paid on time, you are liable for the super guarantee charge under the Superannuation Guarantee (Administration) Act 1992 (Cth). Under Payday Super the ATO calculates it for you: the unpaid shortfall, plus notional earnings calculated at the general interest charge rate, plus an administrative uplift, plus a choice loading if you did not follow choice of fund rules. The ATO now assesses this directly without requiring you to lodge a statement, and it is not something you can simply pay your way out of by catching up later, because the charge is calculated on each payday where the shortfall existed.

If you fail to withhold tax that should have been withheld, the ATO can hold you liable for the amount and apply penalties, while the employee still faces their own tax consequences from the misclassification. On the employment side, a dismissal dressed up as redundancy can be challenged as unfair dismissal or as a sham redundancy, and a settlement deed that misdescribes its payment components creates a dispute with the very person you were trying to exit cleanly. Records matter because in an audit or a claim, your contemporaneous classification notes and calculation worksheets are the evidence that a decision was made deliberately rather than guessed.

A termination payment compliance checklist

Work through these steps before any final payment is made:

Confirm the exit: termination date, cessation reason, and any notice requirements under the contract, award or agreement.
List every component: write the full final payment down before any money moves, including wages, leave, notice, redundancy, settlement and bonuses.
Classify each component: identify it as ordinary earnings, a leave payment or an ETP, and note any genuine redundancy tax-free amount.
Withhold correctly: use Schedule 11 for ETPs and Schedule 7 for unused leave.
Report through STP: use the right cessation reason, income types, lump sum codes and ETP types, and finalise the employee's STP data.
Pay SG at 12%: pay it on final ordinary time earnings or qualifying earnings only, within the payday super timeframes, and not on ETPs or leave payouts.
Keep the file: termination letter, redundancy business case and selection notes, calculation worksheets, the deed if there is one, and notes on why SG was or was not paid on each component.
Check the 12-month clock: review any payment made after the exit date, and seek an ATO exemption or a different structure if the window has passed.

When to bring in a professional

A payroll specialist or accountant should own the arithmetic: the ETP cap, the whole-of-income cap, the withholding tables and the STP codes, particularly where an exit involves several components in one payment. A lawyer should own the decisions that sit behind the arithmetic. That includes drafting the deed of release for a negotiated exit and specifying what each payment component is for, running the genuine redundancy process so the business case, consultation and selection notes withstand scrutiny, advising on disputed or misconduct dismissals, and writing to the ATO where the 12-month rule is in issue.

Classify first, then pay

If there is one habit that protects an exit, it is writing down the components and their classification before any payment is made. Everything else, the withholding rate, the ETP cap, the SG answer, the STP codes, follows mechanically once you know what the payment is for. The two mistakes that cost employers most are treating a settlement as ordinary wages, which overpays SG that was never due and misreports the payment, and letting a payment slip past 12 months without checking the consequences. If you cannot say in one sentence what a component is for and why it was classified that way, get advice before you pay, because the classification is the record the ATO and the former employee will both read later.