01 Oct 2025

Tax on Redundancy Payments Explained

Tax on redundancy payments explained

If you’re made redundant, you may receive a lump sum payout. While this can provide financial breathing room, it’s important to understand how that money is taxed. Not all parts of a redundancy payment are taxed the same, and how it is taxed can make a big difference to what you actually take home.

If your position is terminated, you might receive various payments, including:
» Unused annual or long service leave
» Payment in lieu of notice
» A severance payout
» Additional “ex-gratia” or goodwill payments

Some of these are taxed as regular income, others may be taxed concessionally, and some may even be tax-free if it is treated as a ‘genuine redundancy’ amount.

What is a genuine redundancy?

A redundancy is considered genuine if your role no longer exists and is not being replaced. You must also be under age 67 at the time of termination to access tax-free benefits. If you’re dismissed due to poor performance or you resign voluntarily, it doesn’t count as a genuine redundancy.

Tax-free threshold for genuine redundancy

If your redundancy is genuine, part or all of your payout can be received tax-free.

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

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

Any payment above that amount may be taxed as an employment termination payment (ETP).

How are ETPs taxed?

ETPs can include payments like severance pay, golden handshakes, or unused sick leave. How these are taxed depends on your age and how much you receive.

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

In addition to the ETP cap, there is also a ‘whole-of-income cap’ that applies to high income earners. This cap limits how much certain termination payments can qualify for concessional tax treatment.

Unused leave is taxed differently

Payments for unused annual or long service leave are taxed at different rates depending on whether your termination is a genuine redundancy or not.

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

Some tips to reduce tax

You may be able to contribute part of your redundancy payment to super and claim a tax deduction, especially if you have unused concessional cap space from previous years.

The catch-up rules allow you to use any unused portions of the concessional contributions cap (currently $30,000) 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.

Key message

Redundancy payments can be complex, with different components taxed in different ways. Knowing the rules and using strategies like super contributions can make a big difference to what you keep.

If you’re facing redundancy and want to understand your options, give us a call. We can help you plan ahead, minimise tax, and make the most of your payout