When your employment ends, you may receive several types of payments in addition to your final wages — unused annual leave, unused long service leave, and notice. Each is taxed differently under ATO rules. Understanding the distinctions helps you plan for your tax return and avoid surprises.
Types of Termination Payments
| Payment type | Tax treatment |
|---|---|
| Final wages/salary for days worked | Ordinary income — marginal rate |
| Payment in lieu of notice | Ordinary income — marginal rate |
| Unused annual leave (general termination) | Marginal rate (32% cap for over-65s or invalidity) |
| Unused long service leave (post-1978 accrual) | Marginal rate on 100% of amount |
| Unused long service leave (pre-16 Aug 1978) | Marginal rate on 5% of amount |
| Unused long service leave (16 Aug 1978 – 17 Aug 1993) | Marginal rate on 100%, maximum 30% tax rate |
| Employment Termination Payment (ETP) | Concessional — 32% up to the ETP cap |
| Genuine redundancy payment (within limit) | Tax-free (see redundancy article) |
Payment in Lieu of Notice
A payment in lieu of notice — where the employer pays out your notice period rather than having you work it — is treated as ordinary income. It is taxed at your marginal rate and does not receive any concessional treatment. It is included in your assessable income in the year received.
Unused Annual Leave
Unused annual leave paid out on termination is generally taxed at marginal rates as ordinary income. However, there is a concessional rate for certain circumstances:
- Annual leave (and leave loading) accrued before 18 August 1993 is taxed at 32% (regardless of marginal rate)
- For employees who qualify as invalidity or who reach pension age, concessional rates may apply
Most employees leaving jobs in 2025 would have little or no leave accrued before 1993, so the standard marginal rate treatment applies to virtually all leave payouts.
Unused Long Service Leave
The tax treatment of unused long service leave depends on when it was accrued:
| Accrual period | Assessable amount | Tax rate |
|---|---|---|
| Before 16 August 1978 | 5% of payment | Marginal rate on 5% |
| 16 August 1978 – 17 August 1993 | 100% of payment | Capped at 30% |
| After 17 August 1993 | 100% of payment | Marginal rate |
For most employees, only the post-August-1993 rules apply, meaning long service leave payouts are fully assessable at the marginal rate.
Employment Termination Payments (ETPs)
An Employment Termination Payment (ETP) is a lump sum paid in connection with the termination of employment that does not qualify as ordinary wages, annual leave, or long service leave. Examples include:
- Golden handshakes
- Payments in lieu of notice above the minimum notice entitlement (in some circumstances)
- Compensation for loss of employment
- Non-genuine redundancy amounts
The ETP receives concessional tax treatment:
- 32% tax rate (plus Medicare levy) for those under 65
- 17% for those 65 and over, or on invalidity grounds
- Applies only up to the ETP cap ($245,000 for FY2025–26)
- Amounts above the cap: taxed at the top marginal rate
Your employer must provide an ETP payment summary showing the taxable component and the withheld amount. This is pre-filled into myTax.
Superannuation on Termination Payments
Super is generally not payable on:
- Termination payments in lieu of notice
- Unused leave payouts on termination
- Employment termination payments (ETPs)
Super accrues on your ordinary time earnings up to the last day of employment and is paid into your nominated fund regardless of termination.
Frequently Asked Questions
Is my payout for unused annual leave taxed at my marginal rate? In most cases, yes — unused annual leave accrued after 1993 is taxed at your marginal rate as ordinary income. It is included in your assessable income for the year of payment.
Why was my termination payout taxed heavily? Termination payouts are often large lump sums. The employer withholds tax at a flat concessional rate (32% for ETPs) or at the marginal rate for leave — both may feel high. Your tax return will reconcile whether the correct amount was withheld overall.
Can I roll my termination payment into super? In very limited circumstances, some ETP amounts (specifically the “taxable component” of certain ETPs) may be eligible for rollover into super. This is a complex area and professional advice is recommended before making any decisions.
Will I get a tax return refund on my termination payout? It depends on your total income for the year. If you also worked part of the year, your combined withholding may be more or less than your actual liability. Lodge your return and the ATO will calculate the correct amount.
This article provides general tax information. Termination payment rules are complex and depend on the nature of each component. For advice tailored to your situation, speak with a registered tax agent or accountant. Find one through the Tax Practitioners Board register.