Tax On Redundancy Payments Explained

Losing your job due to redundancy can be a stressful and uncertain time.

However, a redundancy payout can also provide an important financial cushion while you plan your next steps.

What many people don’t realise is that not all parts of a redundancy payment are taxed in the same way – and the difference between what’s tax-free, concessionally taxed, or fully taxable can have a significant impact on how much you take home.

Understanding how redundancy payments are structured and taxed in Australia can help you make informed decisions, plan for your next role, and even take advantage of strategies to reduce your overall tax bill.

What’s Included In A Redundancy Payment?

When your employment is terminated, you might receive a combination of different payments. These could include:

• Unused annual or long service leave;
• A severance or redundancy payout; and/or
• Additional ex gratia or goodwill payments.

What Is A Genuine Redundancy?

A redundancy is considered genuine when your role is genuinely abolished – meaning it no longer exists and will not be filled by someone else.

To qualify for tax-free redundancy benefits, the following must apply:

• Your position is terminated because it is no longer required;
• You are under the age of 67 at the time of termination;
• The payment is made in consequence of your redundancy, not voluntary resignation or dismissal for performance reasons; or
• You are not re-employed by the same employer or a related entity.

If you resign voluntarily or are dismissed due to performance, the payment will not be treated as a genuine redundancy, and you won’t be eligible for the tax-free component.

Tax-Free Threshold for Genuine Redundancy

If your redundancy qualifies as genuine, part of your payout can be received completely tax-free.

For the 2025-26 financial year, the tax-free portion is calculated as: $13,100 + $6,552 for each full year of service.

Example:

If you have worked for your employer for 10 full years, your tax-free redundancy threshold is: $13,100 + ($6,552 x 10) = $78,620.

Any payment above that amount will be taxed as an Employment Termination Payment (ETP).

This tax-free portion is separate from other entitlements, such as unused leave, and must be paid as a genuine redundancy amount.

How Are Employment Termination Payments (ETPs) Taxed?

An Employment Termination Payment (ETP) is a lump sum paid when you leave employment, which can include:

• Severance pay;
• Golden handshakes or bonuses;
• Unused sick leave; and
• Payments in lieu of notice.

The tax you pay on an ETP depends on both your age and the amount you receive.

2025-26 Employee Termination Payment Tax Rates:

Age	Payment up to ETP Cap ($260,000)	Payment Above Cap
Under 60	Taxed up to 30% (plus Medicare Levy)	45% (plus Medicare Levy)
60 or over	Taxed up to 15% (plus Medicare Levy)	45% (plus Medicare Levy)

In addition to the ETP cap, there is also a “whole of income cap” which may apply to high-income earners. This cap limits how much of your termination payment qualifies for concessional tax treatment based on your overall income for the financial year.

Unused Leave Is Taxed Differently

Payments for unused annual leave or long service leave are taxed separately from redundancy or ETP amounts.

If your termination qualifies as a genuine redundancy, these leave payments are typically taxed at a maximum rate of 30% (including Medicare Levy).

However, if your employment ends due to resignation or retirement, these payments are generally taxed at your marginal income tax rate, which could be higher.

Strategies To Reduce Tax On Your Redundancy Payment

Receiving a redundancy payout can be an opportunity to improve your financial position if managed wisely. Here are a few strategies that may help reduce tax and strengthen your long-term savings:

Contribute to Superannuation

You may be able to contribute part of your redundancy payment to superannuation and claim a tax deduction, provided you meet contribution eligibility rules.

If you have unused concessional cap space from previous years, you could take advantage of the carry-forward (catch-up) concessional contribution rules. These allow you to use any unused portions of your concessional contributions cap (currently $30,000 per year) from the past five financial years, as long as your total super balance was under $500,000 at the previous 30 June.

This strategy can help offset the taxable portion of your redundancy payment – lowering your overall tax bill while boosting your retirement savings.

Plan The Timing of Your Payment

If possible, consider the timing of your redundancy payment. Receiving the payment early in a financial year can help you manage other income and deductions, reducing your taxable income for that period.

Get Professional Advice Before Making Big Financial Moves

A redundancy can be an emotional and complex event. Before paying off your mortgage, investing, or making large purchases, it’s worth speaking with a qualified financial adviser or tax specialist to assess how best to allocate your payout in line with your goals and tax position.

Wilson Pateras and Your Redundancy

Redundancy payments can be complex, and the tax treatment depends on the nature of each component – from genuine redundancy amounts and ETPs to unused leave and ex gratia payments.

Understanding these distinctions and planning accordingly can make a big difference to what you keep in your pocket.

Your redundancy may be unexpected – but your financial strategy doesn’t have to be.

Get in touch with our team if you’re facing redundancy and would like tailored advice for your situation.