Getting the news of a redundancy can be a real shock. But often, redundancy payments can provide some relief. Since these payments can sometimes be quite generous, it’s natural to have questions about taxes.
Here’s a breakdown of what you need to know.
What is a redundancy?
A redundancy happens when your employer decides your job is no longer needed and ends your employment. It can also happen if the company you work for closes down. In these cases, redundancy payments have special tax rules.
A redundancy doesn’t cover situations where someone leaves their job voluntarily, is dismissed for performance reasons, or retires.
Who is entitled to a redundancy payment?
Not everyone who is made redundant will get a redundancy payment. Casual employees, those hired for a fixed term, workers over pension age, and employees with less than 12 months of continuous service might not qualify. Employees of small businesses (fewer than 15 employees) are generally also excluded.
Tax on redundancy payments
The Australian Tax Office (ATO) allows genuine redundancy payments to be tax-free up to a certain limit. This limit includes a base amount and an additional amount for each year of service with your employer. For 2024-25, the base amount is $12,524 and the service amount is $6,264.
If your payment exceeds this limit, the extra amount is considered an Employment Termination Payment (ETP) and is taxed at a concessional rate. Anything beyond the ETP cap is taxed at your regular marginal rate.
Tax on employment termination payments (ETPs)
ETPs are payments you receive when you leave your job that doesn’t qualify as a genuine redundancy. They are usually taxed at a lower rate than regular income. There are special rules for ETPs if you started working before July 1, 1983, or if you are leaving due to a permanent disability.
Early retirement scheme payments
Early retirement scheme payments are offered to encourage early retirement and are typically taxed at a concessional rate. This applies if the scheme is open to all employees (or a specific group, such as those above a certain age) and has been approved by the Commissioner of Taxation.
Why consult a tax professional?
Redundancy payments can be complex, with different parts taxed in various ways. Aside from redundancy payments and ETPs, there are other payments you might receive, such as:
- Lump sum payments for unused annual or long service leave
- Leave loading when employment ends
- Payments in lieu of superannuation benefits
- Money owed for work already done
To understand which parts of your payment are tax-free, which are concessional taxed, and which are taxed at your normal rate, we recommend speaking with a tax professional. They can help ensure you comply with the rules and make the most of your redundancy payment.
Learn more about working with APS Tax & Accounting.
Written by APS Senior Accountant, Stephen Fry.
Stephen is an accountant with over 13 years of professional expertise in the areas of taxation and accounting. Currently serving as a senior tax accountant at APS Tax, Stephen offers comprehensive guidance and ensures compliance in all tax-related matters. He has developed a specialised focus in areas such as self-managed superannuation funds, cryptocurrency taxation and leveraging software and technology to assist clients in streamlining their processes. Beyond his professional pursuits, Stephen cherishes quality time with his family and enjoys unwinding on the golf course. On the weekends he also enjoys following the AFL and watching British comedy television.