What Is a Golden Handshake (ETP)?

A golden handshake — formally known as an Employment Termination Payment (ETP) — is a lump sum payment you receive when your employment ends. These payments go beyond your regular entitlements like unused annual leave or long service leave. Common examples include severance packages, redundancy pay above the genuine redundancy threshold, early retirement incentives, and payments in lieu of notice.

The ATO distinguishes between two types of ETPs: life benefit ETPs (paid because of your death or termination of employment) and death benefit ETPs (paid to a beneficiary after your death). For most people receiving a golden handshake, the relevant category is a life benefit ETP. The tax treatment depends on several factors including your age at termination, the amount of the payment, and whether it qualifies as a genuine redundancy.

Understanding how a golden handshake tax calculator works is essential for planning your finances after a job separation. A large termination payment can push you into a higher tax bracket in the year you receive it, potentially triggering additional tax obligations. However, ETPs benefit from special tax treatment that can significantly reduce your overall tax bill compared to treating the payment as ordinary income.

Not all payments upon termination are ETPs. Your unused annual leave and long service leave are taxed separately — annual leave at your marginal rate and long service leave at 32.5% up to certain thresholds. Superannuation benefits are also handled separately. Only payments specifically related to the termination of employment that are not ordinary employment income qualify as ETPs.

Genuine Redundancy vs Other Termination Payments

Genuine redundancy payments receive the most favourable tax treatment. A genuine redundancy occurs when your employer decides your job is no longer needed and terminates your employment for that reason. The ATO has strict criteria: your position must truly be abolished, the decision must come from the employer, and the payment must be made specifically because of the redundancy.

Under genuine redundancy rules, a tax-free component applies based on your age and years of service. For FY 2025-26, the tax-free amount is calculated as a base amount of $11,985 plus $5,994 for each complete year of service. Any amount above this threshold is treated as an ETP and taxed at ETP rates. Redundancy payments that don't meet the genuine redundancy criteria are treated as ordinary ETPs.

To claim genuine redundancy treatment, your employer must provide you with a letter confirming the redundancy and stating that your position has been abolished. You should also receive a payment summary that clearly separates the tax-free component from the ETP component. Keep all documentation for your tax return, as the ATO may request evidence if your claim is selected for review.

ETP Tax Rates and Caps for FY 2025-26

The taxation of golden handshake payments follows a structured system of caps and rates. The most important threshold is the ETP cap, which for FY 2025-26 is $225,000 for life benefit ETPs (indexed annually). Payments within this cap receive concessional tax treatment, while amounts above the cap are taxed at higher rates.

For ETPs received by someone under preservation age (currently 60), the taxable component is taxed at a maximum of 32.5% plus Medicare levy (totalling 34.5%) for amounts within the ETP cap. Amounts exceeding the cap are taxed at the top marginal rate of 45% plus Medicare levy (totalling 47.5%).

If you're over preservation age (60 or older) and the ETP relates to termination of employment, the taxable component may be entirely tax-free up to the ETP cap, provided the payment is from a genuine redundancy or early retirement scheme. This makes golden handshakes significantly more tax-efficient for older workers approaching retirement.

There is a second cap called the whole-of-income cap. This limits the amount of ETP that can receive concessional treatment when your total income (including the ETP) exceeds a certain threshold. For FY 2025-26, the whole-of-income cap is $180,000. If your taxable income plus the taxable component of the ETP exceeds this amount, the concessional tax rate only applies to the amount below the cap.

The interaction between the ETP cap and the whole-of-income cap means that high-income earners receiving a golden handshake may face higher effective tax rates. For example, if you earn $150,000 in salary and receive a $200,000 golden handshake, your total income is $350,000. The whole-of-income cap limits the concessional ETP amount, pushing more of your payment into the top tax bracket.

How to Calculate Your Golden Handshake Tax

Calculating the tax on a golden handshake involves several steps. First, determine whether the payment qualifies as a genuine redundancy. If it does, calculate the tax-free component using the formula: $11,985 + ($5,994 × complete years of service). Subtract this from the total payment to find the ETP component.

Next, apply the ETP cap of $225,000. The portion of the ETP component that falls within this cap is taxed at the concessional rate of 32.5% (or 0% if you're over 60). Any amount exceeding the cap is taxed at 47.5%. Finally, check the whole-of-income cap to ensure concessional treatment applies.

Consider a concrete example. Jane, aged 45, is made redundant after 15 years with her employer. She receives a redundancy payment of $180,000. Her tax-free amount is $11,985 + ($5,994 × 15) = $101,895. The ETP component is $180,000 - $101,895 = $78,105. This is within the $225,000 ETP cap, so it's taxed at 32.5% plus Medicare levy = 34.5%. Jane's total tax on the redundancy is $78,105 × 34.5% = $26,946. She keeps $153,054 after tax from her redundancy.

Compare this with John, aged 50, who receives a non-redundancy severance package of $250,000 after 10 years of service. There's no tax-free component. The full $225,000 within the ETP cap is taxed at 32.5% + Medicare levy = $77,625. The remaining $25,000 above the cap is taxed at 47.5% (45% + Medicare levy) = $11,875. Total tax = $89,500. John keeps $160,500. If John were older than 60, the first $225,000 would be tax-free and only the $25,000 above the cap would be taxed.

ETPs and Your Broader Tax Picture

Receiving a golden handshake can significantly impact your overall tax position for the financial year. The payment may push you into a higher marginal tax bracket, affecting how other aspects of your tax return are calculated. For example, the Medicare Levy applies to your entire taxable income (including the ETP), and you lose access to the Medicare levy reduction if your income exceeds the threshold.

If you have a HECS-HELP debt, your compulsory repayment amount increases with your total income. The ETP is included in your repayment income, which may significantly raise your HECS repayment obligation for the year. Plan ahead by setting aside funds for the additional HECS repayment.

You may also consider contributing some of your golden handshake to superannuation to reduce your tax. Personal contributions for which you claim a deduction (concessional contributions) are taxed at just 15% within your super fund, and the contribution reduces your taxable income for the year. However, the annual concessional cap of $30,000 limits how much you can contribute this way. Unused cap amounts from previous years may also be available under the carry-forward rules if your total super balance is below $500,000.

Use our Take-Home Pay Calculator to see how a golden handshake affects your overall after-tax position. Our Income Tax Calculator can help you estimate your tax bracket for the year, and our Superannuation Calculator can help you plan how much of your ETP to contribute to super for maximum tax efficiency.

Reporting Your Golden Handshake on Your Tax Return

Your employer will provide you with a PAYG Payment Summary that clearly shows the different components of your termination payment. The genuine redundancy tax-free component is shown separately and is not included in your assessable income. The taxable ETP component is reported in a specific section of your tax return, not as salary and wages.

When lodging your return, you must include the taxable component of the ETP in the ETP section of your tax return (Item 20 for paper returns or the ETP section in myTax). The ATO's system automatically applies the correct tax rates and caps, but you should double-check that the amounts from your payment summary match what you report. Any unused leave payments are reported separately as salary and wages.

If you used a tax agent or plan to lodge your own return through myTax, the system handles ETP calculations automatically once you enter the correct amounts from your payment summary. Keep your documentation for at least five years, as the ATO may review ETP claims in detail, particularly for larger payments.

Frequently Asked Questions

Is there a limit to how much I can receive tax-free under a genuine redundancy?

Yes. The tax-free amount is calculated as $11,985 plus $5,994 for each complete year of service, for FY 2025-26. Any amount above this threshold is treated as a taxable ETP. For example, someone with 10 years of service can receive $11,985 + ($5,994 × 10) = $71,925 tax-free. Longer-serving employees receive a larger tax-free amount.

Can I contribute my golden handshake to super to save tax?

Yes, you may be able to contribute part of your ETP to super as a personal deductible contribution. This reduces your taxable income for the year, saving tax at your marginal rate. The contribution is taxed at just 15% inside super. However, you're limited by the $30,000 annual concessional cap, though unused cap amounts from previous years may be available if your total super balance is under $500,000.

How does the whole-of-income cap affect my ETP tax?

The whole-of-income cap ($180,000 for FY 2025-26) limits concessional ETP treatment when your total taxable income (including the ETP) exceeds this amount. If your total income is above $180,000, the concessional ETP tax rate (32.5%) only applies to the portion of the ETP below the cap. Any ETP amount above the whole-of-income cap is taxed at the top rate of 47.5%.

Do I pay Medicare Levy on my golden handshake?

Yes, the Medicare Levy of 2% applies to the taxable component of your ETP. This is included in the total tax rates discussed in this guide (32.5% + 2% = 34.5% for ETPs within the cap for those under preservation age). If your income is below the Medicare Levy threshold, you may be exempt from this component.

What if I receive both a redundancy payment and a severance package?

If you receive a genuine redundancy, the tax-free component applies to the redundancy payment. Any additional severance or ex-gratia payment above the redundancy threshold is treated as a separate ETP. All ETP amounts are aggregated for calculating the ETP cap and whole-of-income cap, so multiple payments are combined when determining the applicable tax rates.

Is payment in lieu of notice taxed as an ETP or ordinary income?

Payment in lieu of notice is generally treated as ordinary employment income, not as an ETP. This means it's taxed at your full marginal tax rate, with no concessional ETP tax treatment. The distinction is important because it affects how much tax you pay on your termination package. Your employer's payment summary should correctly categorise each component of your termination payment.

Disclaimer: This article provides general information only and does not constitute tax or financial advice. ETP rules, caps, and thresholds are subject to change. Always verify current information with the ATO (ato.gov.au) and consult a registered tax agent or financial advisor for advice specific to your circumstances.