How are redundancy payments taxed in Australia?

A genuine redundancy payment receives concessional tax treatment. Part of it is tax-free, and any amount above the tax-free limit is taxed as an employment termination payment (ETP) rather than at full marginal rates.

For 2024-25, the tax-free amount is $12,524 plus $6,264 for each completed year of service with that employer. For example, if you have worked for your employer for 10 years, your tax-free amount is $12,524 + ($6,264 x 10) = $75,164. Any redundancy amount above this tax-free threshold is an ETP.

ETPs are taxed at a maximum rate of 32% (including Medicare) for amounts up to the ETP cap ($245,000 for 2024-25). The exact rate depends on whether the payment is a 'life benefit ETP' and your age: if you are under preservation age, the tax rate is 32%; at or over preservation age, it is 17% up to the cap.

Not all termination payments qualify as genuine redundancy. The position must be made redundant, not just the individual. The payment must not exceed what you would reasonably have received in the open market. If the ATO considers the payment not genuine, the full amount is taxed as ordinary income at your marginal rate. Unused annual leave and long service leave are taxed separately, not as part of the redundancy.