Eligible Termination Payments
Eligible termination payments (ETP) are lump sum payments paid to an employee on resignation, retirement or death. The payments are assessable income to the employee but can be taxed at concessional rates depending on the employee’s age and length of employment. An ETP must generally be made within 12 months of an employee’s termination in order to qualify for lower rates of tax.
An ETP may include:
• Payment in lieu of notice,
• ‘Golden handshake’,
• Compensation for wrongful dismissal,
• Payments for genuine redundancy or early retirement scheme that exceed the tax-free part, and
• Compensation for the loss of a job.
Business owners operating through a company or trust structure can pay themselves an ETP when they sell the business, retire from the business, or close the business down.
The advantage of this strategy is that ETP payments are concessionally taxed. If the employee has reached their preservation age (for example aged 56 if born before 01/07/1961) then the first $195,000 ETP payment is only taxed at 17%.
So this means a husband and wife can receive combined ETP payments of $390,000 in the financial year they sell their business and only pay a flat 17% tax on the income (a substantial saving over the company tax rate of 28.5%).