If you’ve recently been made redundant, it’s important to understand how you’ll be taxed so you can make the most of your redundancy payment.

You may be entitled to receive concessional tax treatment that wouldn’t otherwise be available if you left your job for other reasons.

Understanding redundancy payments

For tax purposes, the Australian Taxation Office (ATO) treats payments received upon termination of employment differently, depending on the type of payment received. In particular, a ‘genuine redundancy’ payment is taxed differently to other termination payments.

You don’t normally have to pay tax on a payment that meets the ATO’s definition of a genuine redundancy, up to a tax-free limit. The tax-free limit, which changes every year, is a base amount, plus an amount for each complete year of service with your employer. Any remaining genuine redundancy payment is taxed at concessional tax rates up to a capped limit, which is indexed annually (the ETP cap).

Generally, a redundancy is considered ‘genuine’ if it meets the following criteria:

  • You’re dismissed because your employer no longer requires the job you were doing as part of its business or structure; and
  • You’re under the normal retirement age

A termination payment won’t be considered as a genuine redundancy payment if:

  • You left your job because you reached retirement age
  • You chose to resign
  • Your employer terminated your job contract
  • Your employer dismissed you because of disciplinary or competency issues

What counts as a ‘genuine’ redundancy payment?

In the event of a genuine redundancy, depending on your employment agreement, here are some examples of amounts that may be included as part of a concessionally-taxed genuine redundancy payment, and amounts that may not:

Included
Not included
Payment in lieu of required notice period
Unpaid salary, wages or allowances for work already done
A severance package, such as additional payments based on length of service or unused sick leave
Lump sum payments of unused annual leave or long service leave
A ‘golden handshake’ 
Payment in lieu of superannuation benefits

Since your termination payment may consist of a few of these components, it can be helpful to know about the different tax treatment for each component.

Here’s a summary of which components are taxable and which aren’t:

Component of payment
Tax treatment
Genuine redundancy payment (up to a limit)
Tax-free
Remaining genuine redundancy payment (any money above the tax-free limit), known as employment termination payment (ETP)
Taxed (at concessional rates up to the ETP cap)
Other
Taxed

You can find out more about redundancy payments at the ATO website.

You can also speak to a tax advisor about the tax treatment of a redundancy payment.

Things you should know

  • The Australian income year ends on 30 June. You have from 1 July to 31 October to lodge your tax return for the previous income year. If you use a registered tax agent to prepare and lodge your tax return, you may be able to lodge later than 31 October.
  • Tax law is subject to change. For the latest information, check the ATO website
  • The information provided is of a general nature and doesn’t take into account your personal financial situation – we suggest you seek independent taxation and financial advice.
  • This page is intended to provide general information only and does not take into account your individual objectives, financial situation or needs. Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.
  • Commonwealth Bank is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.