Tax on Redundancy Payments Explained

Being made redundant often comes with a lump sum payout. While this can provide valuable financial support, it’s important to understand how the payment is taxed. Not all components are taxed the same way, and the tax treatment can significantly affect how much you actually take home.

What’s Included in a Redundancy Payout?

When your role is terminated, your final payment may include:

• Unused annual or long service leave
• Payment in lieu of notice
• Severance or redundancy payout
• Additional “ex-gratia” or goodwill payments

Some of these are taxed as ordinary income, while others receive concessional tax treatment. If your redundancy qualifies as a genuine redundancy, part of the payout may even be tax-free.

What Is a Genuine Redundancy?

A redundancy is considered genuine if:

• Your position is being abolished and will not be replaced.
• You are under age 67 at the time of termination.

Dismissal for poor performance or voluntary resignation does not qualify as a genuine redundancy.

Tax-Free Threshold for Genuine Redundancy

If your redundancy is genuine, part of your payout is tax-free.

For the 2025–26 financial year, the tax-free limit is:

• $13,100 + $6,552 for each full year of service.

📌 Example: If you worked 10 years, your tax-free amount is:
$13,100 + ($6,552 × 10) = $78,620

Any amount above this threshold may be taxed as an Employment Termination Payment (ETP).

How Are Employment Termination Payments (ETPs) Taxed?

ETPs include payments such as severance pay, golden handshakes, or unused sick leave. The tax rate depends on your age and how much you receive:

• Under 60 years: Payments under the ETP cap ($260,000 in 2025–26) are taxed at up to 30%.
• 60 years or older: The rate reduces to 15%.
• Above the cap: Taxed at 45%.

⚠️ Note: A whole-of-income cap also applies to high earners, limiting how much can be taxed concessionally.

How Unused Leave Is Taxed

Unused leave entitlements are taxed differently depending on the type of termination:

• Genuine redundancy: Taxed at a maximum of 30%.
• Resignation or retirement: Taxed at your marginal tax rate plus Medicare levy.

Reducing Tax on Redundancy Payments

There are strategies to help reduce the tax burden:

• Super contributions: You may contribute part of your redundancy payout into super and claim a tax deduction.
• Catch-up concessional contributions: If your total super balance is under $500,000 (as at 30 June of the previous year), you can use unused concessional cap space from the last five years (currently up to $30,000).

This approach can lower the taxable portion of your redundancy while boosting your retirement savings.

Key Takeaway

Redundancy payments are complex, with different tax treatments applying to each component. Understanding the rules – and using strategies such as super contributions – can help you minimise tax and keep more of your payout.

If you’re facing redundancy, speak with us before making decisions. We can guide you through your options, help reduce tax, and ensure you make the most of your redundancy payment.