Facing redundancy is stressful enough without the added confusion of working out what the ATO takes. The good news: a portion of a genuine redundancy payment is completely tax-free. The less obvious news: the rest is taxed in a way that depends on your age, your years of service, and whether your payment qualifies as a genuine redundancy under ATO rules. This guide breaks it down clearly so you know exactly where you stand.
Key Takeaways
- Genuine redundancy payments have a tax-free component the threshold is based on your years of service
- The taxable portion above the threshold is an Employment Termination Payment (ETP) taxed at concessional rates, not your full marginal rate
- Payments above the ETP cap are taxed at your marginal rate
- Whether your payment qualifies as a genuine redundancy is critical the role must genuinely be abolished
- Getting advice before you agree to a redundancy package can prevent a tax bill you did not plan for
What Is a Genuine Redundancy Payment?
The ATO definition matters here. A genuine redundancy payment is one made to an employee whose job is abolished the position no longer exists. It is not a payment made because the employer wants to exit someone for performance reasons, or one where the same role is filled again shortly after.
Payments that do not meet the ATO’s genuine redundancy test are treated entirely as Employment Termination Payments and taxed without the tax-free threshold applying. Common situations that fail the test include redundancies where the same person is rehired into a substantially similar role, or arrangements where the departure was negotiated around the individual rather than the position.
One thing most guides miss: the ATO considers the substance of the arrangement, not just the label. “Redundancy” written across a payment letter does not automatically make it a genuine redundancy for tax purposes.
The Tax-Free Threshold: How It Is Calculated
For the 2024-25 income year, a genuine redundancy payment is tax-free up to a limit calculated as:
Base amount of $11,985 plus $5,994 for each completed year of service with the employer. These figures are indexed annually confirm the current amounts at ato.gov.au before applying this formula.
So if you have worked for your employer for eight complete years, your tax-free threshold is:
$11,985 + (8 x $5,994) = $11,985 + $47,952 = $59,937 tax-free.
Anything above that threshold is treated as an Employment Termination Payment taxed at concessional rates, which are lower than your standard marginal rate, but not zero.
How the Taxable Portion of a Redundancy Is Taxed
Employment Termination Payment (ETP) component
The portion of your redundancy above the tax-free threshold is classified as an Employment Termination Payment. ETPs are taxed at a maximum of 32% (including Medicare Levy) if you are under preservation age, or a maximum of 17% if you are at or above preservation age but only up to the ETP cap.
The ETP cap for 2024-25 is approximately $245,000. Amounts above the ETP cap are taxed at your full marginal rate plus Medicare Levy. Confirm the current cap at ato.gov.au as it is indexed annually.
Why the Medicare Levy applies
The Medicare Levy of 2% applies to most taxable income in Australia, including ETPs. When people refer to the 32% rate on ETPs, they mean 30% tax plus 2% Medicare Levy. If you hold a Medicare Levy exemption, the effective rate drops accordingly.
The whole-of-income cap
There is another cap that many people are not told about. The whole-of-income cap means the concessional ETP tax rate only applies to the portion of your ETP that, when added to your other taxable income for the year, does not push you above $180,000. Any ETP amount that takes your total income above $180,000 is taxed at your marginal rate rather than the concessional ETP rate.
Practical implication: if you have already earned substantial income in the year you are made redundant, the concessional ETP rate may apply to less of your payment than you expect. This is worth modelling before you finalise your package.
Using a Redundancy Tax Calculator: What to Expect
The ATO provides a tax withheld calculator at ato.gov.au that can estimate the tax on a redundancy or ETP payment. To use it accurately, you need:
- Your total redundancy payment amount
- Your completed years of service with the employer
- Your age at the time of payment
- Your estimated total taxable income for the year including other employment income
- Whether your employer has confirmed the payment qualifies as a genuine redundancy
The calculator gives an estimate of tax withheld at source. The actual tax on your return depends on your total income for the year including investment income, rental income, and other sources. The calculator is a starting point. A tax accountant can model this using your actual figures and give you a complete picture.
What Your Employer Should Be Doing
Your employer is required to withhold tax from the taxable component of your redundancy before paying you, and to provide an income statement showing the breakdown: tax-free component, ETP component, and tax withheld. Keep this document your tax agent needs it at return time.
If your employer has withheld too much or too little, the correction happens in your annual tax return. Both outcomes are common particularly when payroll teams misapply the tax-free formula or do not account for the whole-of-income cap. Your accountant will spot and fix this when preparing your return.
How Annual Leave and Long Service Leave Are Taxed at Redundancy
Unused annual leave and long service leave paid out at redundancy are not part of the tax-free redundancy component. They are taxed as ordinary income, withheld by your employer at your marginal rate, and included in your annual return alongside your salary. This surprises many people who assume the tax-free treatment covers the entire payout.
For long service leave accrued in very early employment periods, concessional treatment may apply in specific circumstances. A tax agent can assess whether this is relevant to your situation.
What to Do If You Are Facing Redundancy Right Now
- Ask your employer for a written breakdown of how each component of your payment has been calculated
- Confirm that your role is genuinely being abolished — not changed and then filled by someone else shortly after
- Consider the timing: redundancies late in the financial year mean your year-to-date income may be lower, reducing the impact of the whole-of-income cap
- Get advice before you sign anything the package you agree to is the package you are taxed on
- If you have unused annual leave or long service leave, ask how these will be paid — they are taxed differently from the redundancy payment itself
Frequently Asked Questions
Is redundancy pay taxable in Australia?
Partly. A genuine redundancy payment has a tax-free component based on your years of service. The portion above that threshold is treated as an Employment Termination Payment and taxed at concessional rates generally 32% including Medicare Levy if you are under preservation age, or 17% if at or above. Amounts above the ETP cap are taxed at your full marginal rate.
How do I use a redundancy tax calculator in Australia?
The ATO’s withholding calculator at ato.gov.au is the most reliable tool. You need your total payment amount, completed years of service, age, and estimated annual income. Any calculator gives an estimate — the final tax position is determined at lodgement when your total annual income is known. A tax accountant can model the full picture using your actual figures.
What is the tax-free amount for redundancy in Australia?
For 2024-25, the tax-free limit is $11,985 plus $5,994 for each completed year of service. These amounts are indexed annually. A person with 10 completed years of service would have a tax-free threshold of $71,925. Always confirm the current figures at ato.gov.au before applying these numbers.
What happens if my redundancy does not qualify as a genuine redundancy?
If the ATO determines your payment does not meet the genuine redundancy criteria, the entire payment is treated as an Employment Termination Payment with no tax-free component. This can substantially increase your tax bill. If there is any question about whether your redundancy qualifies, seek advice before your employer finalises the payment documentation.
