Lump Sums, ETPs & Super Streams: Australian Tax Guide 2025–26

Updated June 15, 2026 by Eduyush Team

Australian Taxation · Employment & Retirement Payments

Lump Sums, ETPs & Super Streams: Australian Tax Treatment

Tax rates, caps, return labels and planning strategies for every type of employer payment, employment termination payment and superannuation benefit — 2025–26.

Financial year 2025–26 · Last reviewed June 2026 · Sources: ATO, ITAA 1997, ITAA 1936

FY 2025–26 ETP cap $260,000 Untaxed plan cap $1.865m Preservation age 60

Quick answer

Employer lump sums, employment termination payments (ETPs) and superannuation benefits each carry different tax rates, caps and tax-return labels, and the outcome depends on three things: the type of payment, the date the entitlement accrued, and the recipient's age. The two most consequential limits are the ETP whole-of-income cap ($180,000) and the super untaxed plan cap ($1.865m in 2025–26). Misclassifying a payment can cost tens of thousands in avoidable tax.

Key takeaways

  • Five employer lump-sum labels (A, B, D, E, W) each have their own rate — from tax-free (D) to full marginal rate (W).
  • Excluded ETPs (genuine redundancy excess, invalidity, unfair dismissal) use the ETP cap only; non-excluded ETPs (golden handshakes, pay in lieu) are also limited by the whole-of-income cap.
  • For a super taxed element, the difference between age 59 and age 60 is the difference between up to 20% tax and zero.
  • Untaxed elements from government funds (CSS, PSS, military) are never fully tax-free — claim the 10% offset at T2.
  • Getting the classification right before settlement matters more than the headline amount.

Part 1 · Items 3 & 24How are employer lump sum payments taxed?

📋

What are employer lump sum payments?

When employment ends — or back pay is received — some payments get concessional tax treatment and are shown separately on the income statement, rather than in gross salary. Each type has its own label (A, B, D, E, W) and its own tax rate. Getting the label right determines whether the ATO applies the correct maximum rate.

A
Lump Sum A
Max 30%
What's in it:
• Long service leave accrued 16 Aug 1978 – 17 Aug 1993
• Unused annual leave up to 17 Aug 1993
• LSL & annual leave paid due to genuine redundancy, invalidity or early retirement (any date)
Item 3R — Type R or T
B
Lump Sum B
5% at marginal rate
What's in it:
• Long service leave accrued before 16 Aug 1978 only
• Only 5% of the amount is included in assessable income
• No offset — the 5% is taxed at marginal rate
Item 3H — 5% of B amount
D
Lump Sum D
Tax free ✓
What's in it:
• Tax-free component of genuine redundancy
• Tax-free component of approved early retirement
• 2025: $12,524 + ($6,264 × complete years)
• Non-assessable non-exempt (NANE) income
Not on return — NANE
E
Lump Sum E
Marginal + offset
What's in it:
• Back pay that accrued 12+ months before payment
• An offset reduces tax to the original-year amount
• Calculated by ATO (STP Phase 2) or via schedule (Phase 1)
Item 24 — Category 1
W
Lump Sum W
Marginal rate
What's in it:
• Return-to-work payments
• Made to encourage an employee back after absence
• No concessional treatment — full marginal rate
Item 1 — Gross salary

Lump Sum D — genuine redundancy tax-free calculation

The genuine-redundancy tax-free formula

Tax-free limit = $12,524 + ($6,264 × complete years of service) 2025–26 limits: base $13,100 + $6,552 per year of service
Years of service 2025 limit 2026 limit
5 years $43,844 $45,860
10 years $75,164 $78,620
15 years $106,484 $111,380
20 years $137,804 $144,140
25 years $169,124 $176,900

Example — Janice, 10.5 years' service

Redundancy payment: $85,000 in 2025

Total redundancy payment$85,000
🟢 Tax-free (Lump Sum D) — $12,524 + (10 × $6,264)$75,164
⚠️ Excess — becomes an ETP (taxed separately)$9,836
Only complete years count: 10.5 years → 10 complete years. The excess becomes a life-benefit ETP subject to the ETP cap rules.
Planning — leave on redundancy: When paid due to genuine redundancy or early retirement, unused annual leave and LSL of any accrual date is taxed at max 30% (Lump Sum A) — better than the marginal rate that applies to post-1993 leave on a normal termination.
Leave type Accrual date Normal termination Genuine redundancy / early retirement Label
Annual leave Up to 17 Aug 1993 Max 30% Max 30% A
Annual leave Post 17 Aug 1993 Marginal Max 30% A / Gross
Long service leave Before 16 Aug 1978 5% marginal 5% marginal B
Long service leave 16 Aug 1978 – 17 Aug 1993 Max 30% Max 30% A
Long service leave Post 17 Aug 1993 Marginal Max 30% A / Gross

Part 2 · Item 4What is an employment termination payment (ETP) and how is it taxed?

⚡

What is an ETP?

An ETP is a lump sum paid on, or because of, the end of employment. It receives concessional tax treatment up to a cap — but the cap that applies depends on whether the payment is "excluded" or "non-excluded." Get this wrong and the client may face unexpected top-rate tax at lodgement.

ETP Type 1 — Code R

Excluded ETPs ETP cap only

Only the ETP concessional cap ($260,000 in 2025–26) applies. The whole-of-income cap does not apply — the concessional rate is kept regardless of other income.
  • Genuine redundancy payments above the tax-free limit
  • Approved early retirement scheme payments (excess)
  • Invalidity payments (permanent disability)
  • Compensation for personal injury
  • Compensation for unfair dismissal
  • Compensation for harassment or discrimination
Planning advantage: An excluded ETP lets a client receive a large payment and still pay only the concessional rate — even if their other income is $200,000. The whole-of-income cap is irrelevant here.

ETP Type 2 — Code O

Non-excluded ETPs Lesser of both caps

BOTH the ETP concessional cap AND the whole-of-income cap apply. The lower of the two sets how much gets concessional treatment — the rest is taxed at top rate.
  • Golden handshake or gratuity
  • Payment in lieu of notice
  • Non-genuine redundancy payments
  • Severance pay
  • Unused sick leave payments
  • Unused rostered days off (RDOs)
Planning risk: If a client earns $150,000 in wages before a $75,000 gratuity, their whole-of-income cap is just $30,000 — only $30,000 gets concessional rates. The remaining $45,000 is taxed at 47%. The employer may not know about the other income.

The two caps explained

ETP concessional cap vs whole-of-income cap

For non-excluded ETPs, the lower of these two caps sets the concessional amount. Anything above the applicable cap is taxed at 47% (top marginal rate + Medicare).
ETP concessional cap
$260,000
2025–26 (was $245,000 in 2024–25)
Maximum total ETPs across all employers in the year that can receive concessional rates. Indexed annually in $5,000 increments. Applies to ALL ETPs.
Applies to: all ETPs ✓
→ lower of →
Whole-of-income cap
$180,000
Fixed — not indexed (set in 2012)
Reduced dollar-for-dollar by ALL other taxable income in the year — before and after termination. One new job after termination can wipe out the entire cap.
Applies to: non-excluded ETPs only
Whole-of-income cap available = $180,000 − all other taxable income in the year Example: other income = $120,000 → cap remaining = $60,000 If ETP is $75,000 → $60,000 at concessional rate, $15,000 at 47%
⚠️ Key trap: The whole-of-income cap uses income the employer often does not know about — a second job taken after termination, investment income, trust distributions. Warn clients to check at lodgement. The $180,000 cap is also not indexed, yet the top marginal rate now starts at $190,000 — so some people pay top rate on ETP amounts that wouldn't otherwise attract it.

Item 4 — concessional rates within the cap

ETP tax rates — life benefit (2025–26)

A tax offset ensures the correct rate is charged: the gross ETP is included in income and the offset reduces it to the concessional rate. Tax software does this automatically.
Age at termination Within cap Rate (max) Above cap Rate above cap
Under 60 (below preservation age) Up to applicable cap Max 32% (30% + 2% Medicare) Excess 47%
60+ (at/above preservation age) Up to applicable cap Max 17% (15% + 2% Medicare) Excess 47%
Death benefit — to dependant Up to applicable cap Tax free Excess 47%
Death benefit — to non-dependant Up to applicable cap Max 32% Excess 47%
Preservation age is 60 for all individuals from 1 July 2024. Life-benefit and death-benefit caps are separate — receiving one does not reduce the other.

Part 3 · Item 8How is a superannuation lump sum taxed?

Everything flows from the components

Super payment components

Every super payment — lump sum or income stream — splits into two components with completely different tax treatment. The fund determines the split.
🟢 Tax-free component
NANE income — never taxed, never on the return, not counted in any income test.
Made up of:
• Personal after-tax (non-concessional) contributions
• Spouse contributions
• Government co-contributions
• Crystallised pre-2007 tax-free amounts
Always tax free — at any age
🟡 Taxable component
Age-dependent. Has two sub-elements — taxed and untaxed — with different rates at every age.
Taxed element (most funds):
• Employer SG (taxed 15% in fund)
• Salary sacrifice
• Personal deductible contributions

Untaxed element (gov't funds):
• Public-sector scheme contributions
• Insurance component where deduction claimed
Tax depends on age & element — see below

Item 8 — 2025–26 rates · preservation age now 60 for everyone

Super lump sum — life-benefit tax treatment

The key milestone is now simply age 60. From 1 July 2024 all individuals reach preservation age at 60 — the old "preservation age to 59" band no longer exists for new retirees.
Under 60 at payment date
Full tax applies
Taxed element:
Full amount at max 20%

Untaxed element:
Up to $1.780m → max 30%
Above $1.780m → 45%
60 or over at payment date
Taxed element is free 🎉
Taxed element:
Tax free — NANE
Not in income, no Medicare

Untaxed element:
Up to $1.865m → max 15%
Above $1.865m → 45%
Death benefit — to non-dependant
Taxable at flat rates
Taxed element:
max 15% regardless of age

Untaxed element:
max 30% regardless of age

Dependants: generally tax free
The Medicare rule: Where a taxed-element super lump sum is taxed at 0% (person 60+), no Medicare levy is payable, and it's excluded from income for MLS purposes. It must still be recorded in a spouse's income at Label F (spouse details) so the family MLS threshold is calculated correctly.

Part 4 · Item 7How are superannuation income streams (pensions) taxed?

💰

Income stream vs lump sum — what changes?

A super income stream (pension) is a series of regular payments rather than a one-off withdrawal. The same component rules apply, but treatment by age differs slightly — and the 10% offset on untaxed elements matters for government employees. For an account-based pension paid to someone aged 60+, no payment summary is issued — it simply isn't taxable.

Item 7 — 2025–26 · preservation age now 60 for all

Super income stream — life-benefit tax treatment

From 2025 onwards the "preservation age to 59" band has gone. Only two age categories apply to income streams — below 60 and 60-and-over.
Age at payment Taxed element Untaxed element Tax-return action
Below 60 Assessable — marginal
15% offset for disability streams only 		Assessable — marginal
No offset 		Item 7 labels J (taxed) & N (untaxed)
60 and over NANE — not taxable
No payment summary 		Assessable — marginal +10% offset Taxed = no action. Untaxed at label N + T2 offset
Disability (any age, taxed fund) Assessable — marginal +15% offset Assessable — marginal
No offset 		Item 7 — offset at T2
Death benefit — recipient under 60, deceased under 60 Assessable — marginal
No offset 		Assessable — marginal
No offset 		Full amount at marginal rates
Defined-benefit income cap: $118,750 (2025) / $125,000 (2026). If a capped defined-benefit stream exceeds this, the excess can become taxable even for taxpayers 60+. Affects a small number of public-sector pensioners.
The 10% offset on untaxed income streams: Government employees (CSS, PSS, military, state schemes) often have an untaxed element. At 60+ they still pay marginal rates on it, but a 10% offset reduces the effective rate — someone in the 37% bracket pays effectively 27%. Claim it at Item T2; for defined-benefit pensions it may need manual calculation.

Quick referenceEvery payment type compared

Payment type What triggers it Tax treatment Return item Planning note
Lump Sum A Leave before 17 Aug 1993 / redundancy leave (any date) Max 30% Item 3R Code R = redundancy/invalidity/early retirement; T = other
Lump Sum B LSL accrued before 16 Aug 1978 5% marginal Item 3H Only relevant after ~46 years' service
Lump Sum D Tax-free part of genuine redundancy / early retirement Tax free (NANE) Not on return $13,100 + $6,552/yr (2026). Excess → ETP
Lump Sum E Back pay accrued 12+ months ago Marginal + offset Item 24 Cat 1 Offset by ATO (STP2) or schedule (STP1). Must be 10%+ of taxable income
ETP — excluded Redundancy excess, invalidity, unfair dismissal, harassment Max 17% (60+) / 32% (<60) Item 4 — Code R ETP cap only ($260k). No whole-of-income test
ETP — non-excluded Golden handshake, gratuity, lieu of notice, sick leave, RDOs 17%/32% within cap; 47% above Item 4 — Code O Lower of ETP cap & whole-of-income cap. High risk for high earners
Super lump sum — taxed, <60 Withdrawal before age 60 Max 20% Item 8 — label Q Delay to 60 → zero tax on taxed element
Super lump sum — taxed, 60+ Withdrawal at/after age 60 Tax free — NANE Item 8 (not in income) No Medicare; spouse records at Label F for MLS
Super lump sum — untaxed Withdrawal from government (untaxed) fund Max 15% (60+, within cap) Item 8 — label P Untaxed plan cap $1.865m. Above = 45%
Super income stream — 60+, taxed Pension from account-based super Tax free — NANE No entry needed No PAYG summary. Fund earnings taxed 0% in pension phase
Super income stream — 60+, untaxed Pension from government defined-benefit fund Marginal − 10% offset Item 7 — N + T2 CSS, PSS, military. Claim 10% offset at T2. DB cap may apply

LodgementWhere each payment goes on your return

3R
Lump Sum A
Leave taxed at max 30%. Enter amount and Code R or T.
3H
Lump Sum B
Enter only 5% of the Lump Sum B amount from the income statement.
4I
ETP taxable component
Include taxable component with ETP code (R, O, S, P, D, N, B, T).
7J
Income stream — taxed
Taxable component from a taxed-fund income stream.
7N
Income stream — untaxed
Assessable untaxed element from a government-fund pension.
8Q
Super lump sum — taxed
Assessable amount from a taxed-fund lump sum. Offset applied for correct rate.
8P
Super lump sum — untaxed
From untaxed (government) funds. Different concessional caps apply.
T2
Income stream offset
10% offset for untaxed super income streams (60+), or 15% for disability.
24
Lump Sum E
Category 1. Back-pay arrears. ATO calculates the offset from the year breakdown.

Adviser playbookTax planning strategies

🎯 Strategy 1 — Wait until 60 to withdraw the taxed element

The single most powerful super timing decision. A $200,000 taxed element withdrawn at 59 attracts up to 20% tax = $40,000. The same withdrawal at 60 attracts zero tax. If a client is approaching 60 and considering an early withdrawal, delay as long as financially possible — the saving is permanent and can't be reclaimed afterwards.

🎯 Strategy 2 — Classify the ETP correctly: excluded vs non-excluded is real money

Payments for genuine redundancy, invalidity or unfair dismissal are excluded ETPs — the whole-of-income cap doesn't apply, so a $150,000 unfair-dismissal ETP is concessional in full. The same $150,000 as a golden handshake (non-excluded), for someone also earning $130,000 in wages, is concessional on only $50,000 ($180,000 − $130,000). Settle the ETP type before signing.

🎯 Strategy 3 — Maximise Lump Sum D before it overflows into ETP territory

On genuine redundancy the tax-free formula is $13,100 + ($6,552 × complete years) for 2026, and only complete years count. An extra few months can add a full $6,552 to the tax-free component. At 32% tax, each extra year of service is worth roughly $2,097 in tax saved on the tax-free component alone.

🎯 Strategy 4 — Redundancy turns leave from ordinary income into concessional

On normal resignation, unused annual leave accrued post-17 Aug 1993 is taxed at full marginal rate. On genuine redundancy, that same leave — whenever it accrued — is taxed at max 30% (Lump Sum A). For clients with large accrued balances, the gap between resignation and a redundancy package can be substantial — a legitimate structuring point in enterprise-agreement negotiations.

🎯 Strategy 5 — Defined-benefit recipients: don't overlook the 10% offset

CSS, PSS, military and state-government recipients often have large untaxed elements. Unlike account-based pensions (tax free at 60+), these are taxable at marginal rates — but the 10% offset at Item T2 is critical. At a 37% marginal rate, the effective rate becomes 27%. Confirm the T2 offset is applied correctly every year.

"Think of super like wine — the longer it stays in the cellar (past age 60), the less you pay to uncork it."

A taxed super lump sum before 60 is like selling wine before it's ready — you pay up to 20%. At 60 and over, the government lets you open the bottle tax-free. The ETP system works the same way: the type of payment, not just the amount, decides whether you're buying premium or paying the penalty rate.

FAQFrequently asked questions

What is the difference between Lump Sum A and ordinary salary on termination?

Lump Sum A (Item 3R) is taxed at a maximum of 30% — more concessional than the marginal rate on ordinary salary. It covers unused annual leave accrued before 17 August 1993 and all unused leave paid on genuine redundancy, invalidity or early retirement regardless of accrual date. Post-1993 annual leave on a normal termination (resignation, retirement) goes into gross salary at Item 1 and is taxed at the full marginal rate.

What is the whole-of-income cap for ETPs and how does it work?

The whole-of-income cap ($180,000, not indexed) applies only to non-excluded ETPs such as golden handshakes, gratuities and payments in lieu of notice. It is reduced dollar-for-dollar by all other taxable income in the income year — before and after termination — and limits how much of the ETP gets concessional rates; amounts above it are taxed at 47%. It does not apply to excluded ETPs like genuine redundancy payments.

When is a super lump sum tax-free?

The taxed element of a super lump sum is completely tax-free (NANE income) for anyone aged 60 or over at the payment date. Under 60, the taxed element is taxed at a maximum of 20%. The untaxed element from government defined-benefit funds is never fully tax-free — max 15% (60+) up to the untaxed plan cap, and max 30% if under 60.

What is the difference between a super lump sum (Item 8) and a super income stream (Item 7)?

A super lump sum is a one-off withdrawal; a super income stream (pension) is a series of regular payments. They are reported and taxed differently. For someone 60+ with a private fund, both the lump-sum taxed element and the income-stream taxed element are NANE (no return entry, and no PAYG summary for the income stream). Government defined-benefit pensions (untaxed element) are always assessable at marginal rates with a 10% offset at T2, regardless of age.

How is Lump Sum D calculated for genuine redundancy?

The 2026 tax-free limit is $13,100 base plus $6,552 for each complete year of service. Only complete years count — 10.5 years uses 10 complete years. Any redundancy payment above this limit becomes an employment termination payment (ETP) subject to the ETP cap rules.

Disclaimer

General information only — not financial, tax or legal advice. Figures reflect 2025–26 thresholds as compiled here; verify all amounts at ato.gov.au or consult a registered tax agent before lodgement.

Lump Sums, ETPs & Super Streams — 2025–26 · Sources: ITAA 1997, ITAA 1936, ATO

ETP cap 2024–25 $245,000 · 2025–26 $260,000 · WOI cap $180,000 (not indexed) · Untaxed plan cap 2024–25 $1.780m · 2025–26 $1.865m

For adviser reference — verify all figures against current ATO guidance before lodgement.

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