Redundancy payments can arrive at one of the most stressful times in a person’s life. Whether you’re an individual, a couple, or a family, losing employment due to workplace relocation, reorganising business operations, or downsizing can have a major financial impact. Understanding how termination payments—particularly genuine redundancy payments—are taxed in Australia is essential for managing household expenses and planning your financial future.
This guide breaks down the taxation laws surrounding redundancy payouts, helping you understand your tax obligations, your tax-free limits, and the rules under the Australian Taxation Office (ATO). As a financial advisor, my goal is to help you confidently navigate your employment circumstances while maximising tax-free redundancy benefits where possible.
What Is a Redundancy Payment?
A redundancy payment, sometimes referred to as severance pay or a “golden handshake,” is provided when your employer decides your role is no longer required. Reasons may include workplace relocation, business restructuring, an enterprise agreement review, industry award changes, or National Employment Standards (NES) requirements.
In Australia, redundancy pay is governed by employment law under the Fair Work Act 2009 and may be affected by:
- Your employment agreement or workplace agreement
- Industry awards such as the Building and Construction Award
- National Employment Standards
- The Fair Work Commission’s rulings
Redundancy payments often include:
- Severance pay
- Payment for your final workday
- Payment in lieu of notice
- Compensation for unused annual leave and long service leave
- Accrued leave for unpaid leave periods
However, it’s important to distinguish between genuine redundancy and non-genuine redundancy, as the taxation and concessions differ significantly.
Types of Redundancy Payments and Their Tax Treatment
a. Genuine Redundancy Payments
A genuine redundancy applies when your employer decides your job is no longer required and you are under pension age at the time of termination. The Income Tax Assessment Act 1997 outlines the criteria for a genuine redundancy, including:
- The role is abolished, not simply replaced
- The termination is not due to disciplinary issues
- You are under the legislated retirement age or Age Pension age
- The termination is involuntary
Genuine redundancies attract concessional tax treatment and may include tax-free redundancy benefits calculated using a tax-free threshold set by the Australian Tax Office.
Summary Table: Genuine Redundancy Payments
| Included | Not Included |
|---|---|
| Severance pay | Unused annual leave |
| Payment in lieu of notice | Long service leave |
| Gratuity | Superannuation benefits |
| Golden handshakes | Early retirement scheme payments (separate rules) |
b. Employment Termination Payments (ETP)
Employment termination payments (ETPs) include payments that fall outside genuine redundancy rules, such as:
- Unused sick leave
- Payments exceeding the tax-free limit
- Certain early retirement scheme payments
- Non-genuine redundancy payments
- Employer termination payments arising due to disciplinary issues
ETPs are taxed at concessional tax rates up to an annual cap. Above this cap, higher tax rates apply. Correct classification is crucial, as misclassification may have serious tax consequences.
c. Payments for Accrued Leave
Payments for unused annual leave, long service leave, unpaid leave, and accrued leave are not included in redundancy concessions. These are taxed differently and included in your income statement and tax return.
Tax-Free Limits and Calculations
The Australian Taxation Office sets a tax-free threshold for genuine redundancy payments. This is determined using a base amount plus an additional amount for each completed year of service.
For the 2025–26 financial year:
- Base amount: $13,100
- Service-based amount: $6,552 per completed year of service
This formula helps calculate the tax-free redundancy benefits available before tax applies.
Step-by-Step Guide: Calculating Your Tax-Free Redundancy Amount
- Identify the base amount for the current year.
- Multiply the service-based amount by your completed years of service.
- Add the two amounts to determine your tax-free limit.
- Use tools like the Notice and Redundancy Calculator, the Fair Work Commission resources, or your employer’s workplace agreement.
What Happens if the Payment Exceeds the Tax-Free Limit?
Any redundancy payout above the tax-free limit is taxed as an ETP. Tax rates depend on:
- Whether you are under or over preservation age
- Whether the payment falls within the concessional ETP cap
- Your retirement age under relevant employment conditions
Consult a tax professional or tax advisor (such as H&R Block or a licensed financial advisor) to ensure compliance with taxation laws.
Comparison Table: Tax Rates on Redundancy Payments Above the Tax-Free Limit
| Age | Payment Type | Tax Rate |
|---|---|---|
| Under preservation age | ETP | Concessional tax rate capped |
| Over preservation age | ETP | Lower concessional tax rate |
Practical Examples
Example 1: Individual under pension age with 5 years of service.
A genuine redundancy is declared due to reorganising business operations. The tax-free threshold is calculated using the ATO formula. Any excess becomes an ETP.
Example 2: Individual over retirement age.
Because the employee is beyond retirement age, the payment is treated as a non-genuine redundancy and taxed differently.
Example 3: Large payout exceeding the ETP cap.
Excess payments may be taxed at the highest marginal rate under Income Tax Assessment Act 1997 rules.
Special Cases and Exceptions
Not all terminations qualify as genuine redundancy. Special cases include:
- Early retirement scheme payments (treated differently under taxation laws)
- Voluntary resignations
- Dismissals due to disciplinary issues
- Terminations after pension age
- Payments classified as death benefits
- Situations involving self-managed superannuation funds (SMSFs)
Employment circumstances, workplace agreements, and industry awards all impact the outcome.
How Redundancy Payments Are Reported to the ATO
Redundancy payments appear on:
- Your PAYG payment summary (if applicable)
- Your income statement (through Single Touch Payroll)
These are automatically sent to the Australian Tax Office and must be included in your tax return.
Additional Tips for Managing Redundancy Payments
- Review your household expenses using a budget planner.
- Understand the income maintenance period for Centrelink and Services Australia calculations.
- Assess superannuation benefit rules and the carry-forward concessional contribution rules.
- Consider travel insurance impacts if redundancy affects future plans.
- Be cautious of refinancing moves; you may need a Discharge/Refinance Authority Form.
Frequently Asked Questions
- Do redundancy payments affect Centrelink benefits? Yes, particularly through the income maintenance period.
- Are payments subject to the Medicare Levy? In most cases, yes.
- Can redundancy payments be salary sacrificed? Generally, no.
- What if my employer misclassifies my redundancy? Speak to a tax professional immediately.
- Can redundancy occur under a small business exemption? Small businesses may have modified obligations under the Fair Work Act.
Current Tax Rates and Thresholds
| Type | Base Amount | Service-Based Amount | ETP Cap |
|---|---|---|---|
| Genuine Redundancy | $13,100 | $6,552 per year | ATO-set annual cap |
Glossary of Terms
- Genuine redundancy
- Employment termination payment (ETP)
- Preservation age
- Tax-free threshold
- Income maintenance period
- Concessional contributions cap
Disclaimer
Disclaimer: The information provided on this blog is general in nature and does not constitute specific financial advice. It is intended for educational purposes only and should not be relied upon as a substitute for professional financial advice tailored to your individual circumstances. For personalized financial assistance, please contact Brandon Foster via the contact page.