The whole-of-income cap is used when calculating the withholding tax from ETPs (Employment Termination Payments). When tax is calculated on the ETP, any values below the cap are taxed at 32% or 17% if the employee has reached their preservation age. Any values over the cap are taxed at 47%.
The whole-of-income cap is $180,000 (not indexed) for the 2020-21 income year and future years. The cap is then reduced by all other taxable payments, including:
Year-to-Date Wages
Lump Sum Leave
Any excluded ETPs
Note: The whole-of-income cap is not reduced by ETPs that are coded as 'R', e.g., Genuine Redundancies, etc.
For example, you are terminating an employee who has year-to-date earnings of $150,000, their termination payment includes a Golden Handshake of $40,000 and they are under the preservation age. The whole-of-income cap would be:
$180,000 (whole-of-income cap) - $150,000 (YTD earnings) = $30,000
As the employee's ETP exceeds the whole-of-income cap ($40,000 - $30,000 = $10,000), the ETP tax would be calculated as:
$30,000 (calculated whole-of-income cap) * 32% = $9,600
$10,000 (ETP over the cap) * 47% = $4,700
The ETP tax withheld would be $14,300 from the $40,000 ETP.
Note: ETP tax is calculated by comparing the whole-of-income cap to the ETP cap and using the smaller of the two. The ETP cap is indexed each year and calculated as the cap minus any previously paid ETPs. In most instances, the smaller of the two caps will be the whole-of-income. ETPs that are Life benefit ETPs, e.g. early retirement scheme, genuine redundancy, invalidity or compensation will only use the ETP cap. For more information on the ETPs and ETP Tax, refer to the ATO link below:
Schedule 11 – Tax table for employment termination payments | Australian Taxation Office (ato.gov.au)
Preservation Age
The withholding amount varies depending on whether the employee will reach their preservation age by the end of the income year in which the payment is made. Preservation Age is determined by the employee's date of birth. For example, an employee born on 1 October 1962 will reach their preservation age of 58 on 1 October 2020. Refer to the table below:
Date of birth | Preservation Age |
Before 1/7/1960 | 55 |
1/7/1960 - 30/6/1961 | 56 |
1/7/1961 - 30/6/1962 | 57 |
1/7/1962 - 30/6/1963 | 58 |
1/7/1963 - 30/6/1964 | 59 |
After 30/6/1964 | 60 |
If the ETP Tax in the Termination transaction is incorrect, check the following:
Employee data e.g. date of birth and age
Year-to-Date Earnings
Whether they have received another ETP payment at any point
The ATO website
If, after checking the above, you can raise a case, reference this article and attach the details listed below:
Termination Type
Employee's Hire Date and Date of Birth
Year-to-Date Earnings
Your expected outcome and any manual workings
Termination Transaction details