A termination payment is the total amount paid to an employee when their employment ends — whether through resignation, redundancy, dismissal, or retirement. It includes unused entitlements and may include additional lump sums depending on the reason for leaving.

Understanding the components, tax rules, and timing is essential to avoid payroll errors and ATO penalties.

What’s Included in a Termination Payment?

Component	Included in Termination Pay?	Taxable?
Final ordinary wages	✅ Yes	✅ Yes
Accrued annual leave	✅ Yes	✅ Yes
Accrued long service leave	✅ Yes (if applicable)	✅ Yes
Redundancy or ETPs	✅ If applicable	✅ Special tax rules
Payment in lieu of notice	✅ Yes	✅ Yes
Unused rostered days off (RDOs)	✅ If applicable	✅ Yes

Different components fall under different tax categories, such as lump sum A, B or D, and must be reported correctly through STP Phase 2.

Tax Treatment of Termination Payments

There are two main parts:

1. Taxable components
   • Final wages
   • Unused leave
   • Notice period payments
2. Employment Termination Payments (ETPs)
   • Genuine redundancy payments
   • Golden handshakes
   • Early retirement packages

ETPs have concessional tax treatment if they fall under ATO caps:

• Tax-free base limit (e.g. for genuine redundancy)
• Concessional cap based on years of service

Amounts above these limits are taxed at higher marginal rates.

Timing Requirements

• Termination payments must be processed promptly, typically in the next scheduled pay run or within 7 days of the final workday.
• Superannuation may apply to ordinary time earnings, but not to all ETPs or leave entitlements.

Employer Responsibilities

• Calculate final pay correctly
• Determine applicable tax treatments
• Report all components in STP Phase 2
• Issue an updated income statement to the employee
• Pay out any owed super (where required)

How Ozobooks Helps

• Breaks down each component of the termination
• Ensures accurate PAYG withholding and ETP categorisation
• Reports through STP with correct labels
• Advises on redundancy vs voluntary departure scenarios
• Prevents underpayments and avoids ATO flags

FAQ

Q1: Do all employees get redundancy pay?
No — only employees made genuinely redundant and meeting Fair Work criteria. Contractors and casuals are usually not eligible.

Q2: Is super paid on termination payments?
Only on ordinary time earnings and certain notice period payments — not on unused leave or ETPs.

Q3: Are ETPs taxed differently?
Yes — they are subject to concessional tax rates up to a cap. Excess amounts are taxed at the employee’s marginal rate.

Q4: What if I make an error in termination pay?
You may need to lodge an amended STP report and could face penalties if underpayments occur — Ozobooks can help correct this.