Who This Guide Is For
This guide is for Australian employees who have been made redundant, are facing redundancy, or want to understand how a redundancy payout will be taxed before making career decisions. It is also relevant for HR professionals, payroll officers, and small business owners managing redundancy processes.
Redundancy payments in Australia are taxed under a unique set of rules that many people find confusing. Some parts of your payout may be completely tax-free, while other components are taxed at concessional or marginal rates. Understanding the structure can help you plan ahead and avoid unexpected tax bills.
How Redundancy Payments Are Taxed
1. Genuine Redundancy — The Tax-Free Component
A genuine redundancy occurs when your employer no longer needs your role to be performed by anyone — for example, due to restructuring, automation, or business closure. If your redundancy is genuine, a portion of your payout is completely tax-free.
According to the ATO, the tax-free amount for a genuine redundancy is calculated as: Base amount + (Service amount × Years of service) (ATO guidelines). For FY2025–26, the base amount is $11,985 and the service amount is $5,994 per full year of service.
Example calculation: Sarah has worked for her employer for 8 years and receives a redundancy payment of $60,000. Her tax-free component: $11,985 + ($5,994 × 8) = $59,937 tax-free. Only $63 of her redundancy payment is taxable.
Key conditions for genuine redundancy: Your employment must be terminated at the employer's initiative, the role must genuinely no longer exist, and you must not have reached age 65 or your employment contract's retirement age.
2. Employment Termination Payments (ETP)
Amounts above the tax-free genuine redundancy cap are treated as Employment Termination Payments (ETP). ETPs are taxed concessionally — at a lower rate than your normal income — but the tax treatment depends on your age and the type of payment:
| Payment Type | Your Age | Tax Rate (FY2025–26) |
|---|---|---|
| ETP — below cap | Under preservation age | 32% (up to $245,000) |
| ETP — below cap | At or above preservation age | 17% (up to $245,000) |
| ETP — above cap | Any age | 47% (top marginal rate) |
| ETP — death benefit (to dependant) | N/A | Tax-free |
The ETP cap for FY2025–26 is $245,000 (indexed annually). Amounts above the lesser of the ETP cap and the genuine redundancy tax-free cap are taxed at your marginal rate.
Preservation age for accessing super varies by birth year — for most people currently working (born after July 1964), it is age 60.
3. Unused Annual Leave and Long Service Leave
Annual leave and long service leave paid out on termination are taxed differently from redundancy or ETP payments:
| Leave Type | Tax Treatment |
|---|---|
| Unused annual leave (accrued pre-18 Aug 1993) | Taxed at marginal rates with a maximum rate of 32% |
| Unused annual leave (accrued post-17 Aug 1993) | Taxed at your marginal tax rate (no cap) |
| Unused long service leave (pre-18 Aug 1993) | Taxed at marginal rates with a maximum rate of 32% |
| Unused long service leave (post-17 Aug 1993) | Taxed at marginal rates with a maximum rate of 32% |
| Unused sick leave | Not payable on termination (lapses) |
Important: Annual leave loading — the additional 17.5% paid on top of your base leave rate — is taxed at your marginal rate without any concessional treatment.
4. Redundancy vs Resignation — Tax Implications
If you resign voluntarily (even with a negotiated exit package), you do not qualify for the genuine redundancy tax-free component. Your entire termination payment — including any "golden handshake" — is treated as an ETP and taxed accordingly.
| Scenario | Tax-Free Component | ETP Concessional Tax |
|---|---|---|
| Genuine redundancy | ✅ Yes — base + service amount | ✅ Yes — on amounts above tax-free portion |
| Resignation | ❌ No | ✅ Yes — entire payment treated as ETP |
| Dismissal | ❌ No (unless genuine redundancy) | ✅ Yes |
| Retirement | ❌ No | ✅ Yes |
Practical tip: If you're offered a voluntary redundancy, check whether it qualifies as genuine. The difference in tax treatment can be substantial — tens of thousands of dollars.
5. Tax Planning After Redundancy
Receiving a lump sum redundancy payment can push you into a higher tax bracket for the financial year. Consider these strategies:
- Superannuation contributions: You can make concessional (before-tax) contributions — including unused caps from previous years under the carry-forward rule — to reduce your taxable income
- Timing matters: If your redundancy occurs in June, you have less time to plan. If it occurs in July, you have the whole financial year to manage your tax position
- ETP rollover to super: Under certain conditions, you may be able to roll all or part of an ETP into your superannuation fund, deferring tax until withdrawal
Example — tax planning impact: Tom receives a $130,000 redundancy package in July (genuine). Tax-free component: $65,925. Remaining $64,075 taxed as ETP at 32% = $20,504 tax. If he uses the carry-forward concessional contribution rules to contribute an extra $25,000 to super, he saves roughly $8,000 in income tax for the year.
Common Mistakes People Make
| Mistake | Why It's Wrong | What to Do Instead |
|---|---|---|
| Assuming all redundancy pay is tax-free | Only the genuine redundancy component (base + service) is tax-free | Calculate your tax-free amount using the ATO formula |
| Confusing resignation with redundancy | Resignation does not qualify for the tax-free component | If eligible for voluntary redundancy, confirm genuine redundancy status before accepting |
| Not factoring in leave payouts | Annual leave and LSL are taxed at marginal rates, potentially pushing you into a higher bracket | Time your departure to manage the tax impact |
| Ignoring ETP caps | Amounts above $245,000 (FY2025–26) are taxed at 47% | Consider rolling excess into super where possible |
| Forgetting about HELP/HECS repayments | A lump sum termination payment can trigger compulsory HELP repayments | Factor HELP debt into your tax planning |
Records to Keep
- Termination letter confirming redundancy is genuine and involuntary
- Employment separation certificate from your employer
- PAYG payment summary showing ETP and leave components
- Superannuation statements showing any rollover amounts
- Records of job-seeking expenses (these may be deductible)
- Any correspondence with your employer about the redundancy terms
Quick Checklist
- Is my redundancy genuine (role no longer exists, employer-initiated)?
- Have I calculated my tax-free component using the ATO formula?
- Do I know which part of my payout is ETP vs annual leave vs LSL?
- Have I considered making a concessional super contribution to reduce taxable income?
- Is any part of my ETP above the $245,000 cap?
- Have I factored in HELP/HECS repayment obligations?
- Do I have my termination letter and separation certificate?
- Have I checked whether I qualify for the ETP tax offset (if applicable)?
Redundancy payments are complex — the interaction between tax-free components, ETP caps, leave payouts, and marginal tax rates can result in thousands of dollars in unexpected tax. a registered tax agent (see the directory) Still assessing your options? See our decision guide.
*Disclaimer: This is general information only and does not constitute tax advice. Individual circumstances vary significantly. Consult a registered tax agent for advice specific to your redundancy situation.*