How redundancy is actually taxed in Australia

Redundancy pay is the only money most people ever receive that is taxed four different ways at once — tax-free, 32%, 17% or 47%, depending on amounts, age and how the termination happened. This briefing walks through each rule with the FY 2026-27 figures, verified against the ATO's own schedules. Every scenario links straight into the calculator so you can see it on a payslip.

§1The four buckets of a redundancy package

When a redundancy package lands, the ATO doesn't see one number. It sees up to four components, each with its own tax treatment:

• Genuine redundancy payment — severance pay, including anything above the legal minimum. Tax-free up to a limit (§2); the excess becomes an ETP (§3).
• Employment termination payment (ETP) — the taxable slice of the redundancy payment, plus things like golden handshakes. Taxed at concessional flat rates, subject to caps.
• Unused annual leave and long service leave — never part of the tax-free amount. Taxed separately under their own schedule (§4).
• Ordinary final pay — your last normal wages. Taxed like any other payday.

Your minimum severance itself comes from the National Employment Standards: Fair Work Act s 119 sets a scale from 4 weeks' base pay (at least 1 year of service) up to 16 weeks (9 years), then — counter-intuitively —drops to 12 weeks at 10 or more years, on the theory that long service leave compensates. Small businesses under 15 employees generally owe no NES redundancy pay at all, and casuals are excluded.

§2The tax-free limit: $13,598 + $6,801 a year

For FY 2026-27, a genuine redundancy payment is completely tax-free up to$13,598 plus $6,801 for each completed year of service (ITAA 1997 s 83-175). This is the single most valuable rule in the whole system, and the one stale calculators most often get wrong — the figures index every 1 July.

Completed whole years only — 9 years and 11 months counts as 9.

To get the tax-free treatment, four conditions must hold:

• You were dismissed because the position is genuinely redundant — not resignation, not performance;
• You are under Age Pension age (67) on the day of dismissal;
• The payment is received within 12 months of termination;
• The payment exceeds what a voluntary resignation would have paid — the excess is what qualifies.

§3ETP tax rates: 32%, 17% and 47%

Whatever exceeds the tax-free limit is an employment termination payment, and the ATO's Schedule 11 sets flat withholding rates:

The subtlety competitors routinely fumble is which cap applies. A redundancy excess is anexcluded ETP, tested only against the ETP cap ($270,000 in 2026-27). But a golden handshake or a payment on a non-genuine termination is a non-excluded ETP, tested against thesmaller of the ETP cap and the whole-of-income cap — $180,000 minus everything else taxable you've been paid that financial year. Get retrenched in June after a full year's salary and the whole-of-income cap can shrink to almost nothing, pushing the payment into 47% territory.

§4Tax on unused annual leave and long service leave

Leave payouts are never part of the tax-free amount — they're taxed under their own table, ATO Schedule 7. On a genuine redundancy the rule is simple: flat 32% withholding on unused annual leave (including loading) and long service leave, no matter when the leave accrued.

Two things worth knowing. First, 32% is a withholding rate: at tax time the leave is assessed at your marginal rate with an offset capping it at 30% plus Medicare, so if your marginal rate is lower you get the difference back. Second, the flat rate is a genuine concession — on resignation the same leave is taxed at full marginal rates, which is worse for anyone earning over $45,000.

§5The age rules: what changes at 60 and at 67

Two birthdays change the arithmetic:

• 60 — preservation age. ETP withholding within the cap drops from 32% to 17%. Everyone has the same preservation age now (all cohorts born after 30 June 1964 have reached 60).
• 67 — Age Pension age. The genuine redundancy tax-free limit no longer applies at all. The whole payment becomes an ordinary ETP — still 17% within the cap, but the tax-free floor is gone. If a restructure is looming near your 67th birthday, the timing of the dismissal date can be worth tens of thousands of dollars.

§6Redundancy vs resignation: the tax gap

If a restructure is coming and you're tempted to jump first, understand what resignation costs at tax time:

For a mid-career professional with 8–10 years of service, the difference routinely lands between $20,000 and $60,000. The calculator shows the leave-tax portion of this gap on every genuine-redundancy estimate as the "if you had resigned instead" line.

§7Is your redundancy genuine? The s 389 test

"Genuine redundancy" is doing double duty in this system. For tax, it unlocks the tax-free limit. For employment law, it's the employer's defence against an unfair dismissal claim — and Fair Work Act s 389 gives it three limbs, all of which must hold:

1. The job is no longer required to be performed by anyone due to operational changes;
2. Any consultation obligations in an applicable award or enterprise agreement were met;
3. It was not reasonable to redeploy you within the employer or its related entities.

Red flags: your role is readvertised or refilled; you were selected using performance metrics or shortly after making a complaint; suitable vacancies existed that you were never offered; there was no real consultation. None of these automatically means you have a claim — but they are exactly the factors the Fair Work Commission examines, and the clock is brutal: 21 calendar days from dismissal to lodge, applied strictly. Underpayment claims (short-paid NES redundancy) have 6 years.

The high income threshold also matters: from 1 July 2026, employees earning over $190,100with no award or agreement coverage cannot bring an unfair dismissal claim (general protections claims remain open). Compensation is capped at the lesser of 26 weeks' pay or $95,050.

§8Worked example, end to end

Maya, 49, is made redundant after 10 years and 4 months as a permanent employee of a 200-person company. Base pay $2,100/week ($2,250 with loadings). Her employer pays out her 5 weeks' notice, adds $15,000 ex gratia, and she has $9,200 of unused annual leave.

• NES redundancy pay: 10+ years → 12 weeks × $2,100 = $25,200
• Notice paid out: 4 weeks + 1 (over 45, 2+ years) = 5 × $2,250 = $11,250
• Severance pool: $25,200 + $11,250 + $15,000 = $51,450
• Tax-free limit: $13,598 + 10 × $6,801 = $81,608 → the whole pool is tax-free
• Leave tax: $9,200 × 32% = $2,944
• Net: $60,650 gross − $2,944 = $57,706 — an effective rate of 4.9%

§9Policy brief: what changed on 1 July 2026

§10Frequently asked questions