Redundancy is stressful. Not just emotionally, but financially. And when a lump sum hits the bank account, the next question usually comes fast:
“How much tax am I going to lose on this?”
The short answer is: it depends. The longer answer is what this guide covers. This article explains tax on redundancy payments in Australia, how the ATO looks at different types of payments, what can be tax-free, what is taxable, and where people most often get it wrong.
Because mistakes here cost real money.
What Actually Counts as a Redundancy Payment?
When employment ends due to redundancy, the payout is rarely just one clean number. It’s usually a bundle of different payments, each taxed under different rules.
A typical redundancy payout may include:
- Genuine redundancy pay
- Unused annual leave
- Unused long service leave
- Payment in lieu of notice
- Other termination payments (called Employment Termination Payments, or ETPs)
Here’s the catch. These are not all taxed the same way. Treating them as one lump sum is the first mistake many people make.
Genuine Redundancy vs “Just a Termination”
This distinction matters more than people realise.
Under ATO redundancy tax rules, a payment only qualifies as a genuine redundancy if specific conditions are met. In plain terms:
- The role must no longer exist
- The employee must be under pension age
- The termination must not be voluntary
- The payment must be more than what would be paid if the employee resigned
- There must be no arrangement to rehire the employee into a similar role
Miss one of these, and the payment may lose its tax-free status.
This is where most people get caught out. On paper, the employer says “redundancy”. In practice, the ATO may not agree.
The Tax-Free Limit on Redundancy Payments
If the redundancy is genuine, part of the payment can be completely tax-free. No income tax. No Medicare levy.
For many people wondering how to avoid tax on redundancy payments in Australia, this is the starting point. The ATO allows a portion of a genuine redundancy payout to sit outside the tax system altogether.
The tax-free limit is made up of:
- A base amount, plus
- An additional amount for each completed year of service
This is often referred to as the tax-free limit on redundancy payments.
Genuine Redundancy Tax-Free Limit (2025–2026)
The exact figures are indexed each year, but the structure stays the same. As a 2025-26:
- Base amount: $13,100
- Service amount (For each complete year of service): $6,552
This means long-serving employees can receive a substantial tax-free amount. Sometimes six figures.
Anything above this threshold becomes taxable. Which leads to the next issue.
What Happens to the Amount Above the Tax-Free Limit?
The excess doesn’t just get taxed like normal salary.
It becomes an Employment Termination Payment (ETP).
ETPs have their own tax rules, caps, and rates. They do not receive the tax-free threshold. This is often misunderstood.
For most people:
- ETPs up to the cap are taxed at concessional rates
- Amounts above the cap are taxed at the top marginal rate
On paper, this looks manageable. In practice, incorrect reporting can push tax much higher than necessary.
Practical Example: How to Calculate Tax on Redundancy Payments (Australia)
Let’s make this concrete.
Scenario
- Age: 45
- Years of service: 8
- Genuine redundancy payment: $90,000
Step 1: Work out the tax-free limit
Base amount = $13,100
Service amount: $6,552 × 8 years = $52,416
Tax-free portion:
$13,100 + $52,416 = $65,516
This amount is completely tax-free.
Step 2: Identify the taxable portion
Total redundancy: $90,000
Tax-free amount: $65,516
Taxable portion:
$90,000 − $65,516 = $24,484
Step 3: Apply ETP rules
That $24,484 is treated as an ETP, taxed at concessional ETP rates, not standard income tax rates.
Result:
$65,516 received tax-free
$24,484 taxed under ETP rules
Handled correctly, the tax outcome is reasonable. Handled poorly, it isn’t.
How to Avoid Overpaying Tax on Redundancy Payments in Australia
This is the main issue clients worry about. And rightly so.
Overpaying tax usually comes down to one thing: misclassification. Ways to reduce unnecessary tax include:
- Confirming the redundancy genuinely meets ATO criteria
- Ensuring redundancy pay is not mixed in with ETPs
- Separating leave entitlements correctly
- Applying the tax-free threshold accurately
- Reporting everything under the correct labels in the tax return
Many people assume the employer has done this correctly. Often, they haven’t.
How Leave Payments Are Taxed
Unused leave is not part of the tax-free redundancy limit. This trips people up all the time.
- Unused annual leave is taxed at a capped rate (generally up to 32%)
- Unused long service leave may receive concessional treatment if linked to a genuine redundancy
- These amounts are taxed separately and reported separately
It sounds simple. It isn’t. Especially when multiple payments are bundled together on a payslip.
Common Traps That Cost People Money
Over time, the same issues show up again and again:
- Assuming all redundancy pay is tax-free
- Confusing ETPs with redundancy payments
- Missing the tax-free threshold entirely
- Reporting everything as “lump sum” income
- Not lodging a tax return because “tax was already taken out”
In practice, redundancy payouts are rarely handled perfectly the first time.
Frequently Asked Questions
How much tax do I pay on redundancy in Australia?
There is no single answer. Some people pay no tax at all on a large portion of their redundancy. Others pay more than expected because part of the payment is taxable.
The outcome depends on:
- Whether the redundancy is genuine
- Years of service
- Age
- How much exceeds the tax-free limit
- Whether ETP rules apply
The structure matters more than the headline number.
What is the tax-free limit on redundancy payments in Australia in 2025?
The tax-free limit is calculated using:
- A base amount ($13,100), plus
- Around $6,552 for each completed year of service
These figures are indexed annually. Payments above this limit are taxable.
Do I need to lodge a tax return after redundancy?
Yes. Always.
Even if tax was withheld, lodging ensures:
- Tax-free amounts are recognised correctly
- ETP caps are applied
- Overpaid tax is refunded
Skipping the return often means leaving money with the ATO unnecessarily.
Is redundancy pay taxable in Australia?
Redundancy pay can be partly tax-free in Australia if it qualifies as a genuine redundancy payment. The ATO allows a tax-free amount based on a base limit plus an amount for each completed year of service. For 2025-26, the tax-free limit is $13,100 plus $6,552 for each completed year of service. Any amount above the tax-free limit is generally treated as an Employment Termination Payment.
Does redundancy pay appear in myGov?
Yes. Redundancy-related amounts should generally appear in your income statement in myGov after your employer reports them through payroll. However, the components may be shown separately, such as tax-free genuine redundancy, Employment Termination Payments, unused annual leave, unused long service leave, salary, wages, or other final payments.
What is the difference between a genuine redundancy payment and an ETP?
A genuine redundancy payment is paid because your job is no longer required and you meet the ATO’s genuine redundancy conditions. The eligible part may be tax-free up to the ATO limit.
An Employment Termination Payment, or ETP, is a separate type of payment made because employment has ended. If your genuine redundancy payment is more than the tax-free limit, the excess amount is generally treated as an ETP and taxed under ETP rules.
Is payment in lieu of notice tax-free in Australia?
Payment in lieu of notice is usually not part of the tax-free genuine redundancy amount. It is generally treated separately from the tax-free redundancy component and may be taxed as part of an Employment Termination Payment or another termination payment category, depending on how it is paid and reported.
Is unused annual leave taxed differently after redundancy?
Yes. Unused annual leave and unused long service leave are usually taxed separately from the tax-free redundancy amount. The ATO has specific withholding rules for unused leave payments made when employment ends, so these amounts should be checked separately on your final payslip or income statement.
Does redundancy pay affect Centrelink or JobSeeker in Australia?
Yes, it can. Services Australia says an income maintenance period may apply if you stop work and receive leave or redundancy payments. This may delay or reduce payments such as JobSeeker, Youth Allowance, Parenting Payment, Farm Household Allowance, Austudy, or Disability Support Pension, depending on your circumstances.
Final Word
Tax on redundancy payments in Australia is not just about rates. It’s about structure, classification, and timing.
Handled correctly, redundancy tax is often far lower than people fear. Handled poorly, it becomes expensive very quickly.
Clear Tax works with redundancy payments every day, helping individuals, employers, and advisers navigate ATO rules with clarity, accuracy, and confidence, especially when it matters most.
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