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How are redundancy payments taxed?

How are redundancy payments taxed?

Understanding the taxation treatment of your redundancy payout can help you make the most of it.

If you’ve recently been made redundant, it’s important to understand the financial issues involved – in particular, to learn about your entitlements and how to make the most of your redundancy payment by fully understanding how it’s likely to be taxed.

You may be entitled to receive concessional tax treatment that wouldn’t otherwise be available if you were leaving your job because of other reasons.

Understanding redundancy payments

For tax purposes, the Australian Taxation Office (ATO) treats any redundancy money you receive differently, depending on whether the redundancy is “genuine” or “non-genuine”.

You do not normally have to pay tax on any payment that meets the ATO’s definitions of genuine redundancy, up to a certain 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.

In general, a redundancy is considered genuine if it meets the following criteria:

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

A non-genuine redundancy is likely to be due to:

  • You leaving your job because you reach retirement age
  • You choosing to resign (as opposed to your employer structurally eliminating your job)
  • Your employer terminating your job contract
  • Your employer dismissing you due to reasons such as disciplinary or competency issues

What’s included in a genuine redundancy payment?

Depending on your employment agreement, here are some examples of what may be considered a genuine redundancy payment and what is 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’ – a usually large payout to people losing their job

Payment in lieu of superannuation benefits

Given that your redundancy payment may consist of a few components, it can be helpful to know about the different tax treatments on each component.

The table below summarises the taxable and non-taxable portions:

Component of payment

Tax treatment

Genuine redundancy payment (up to a limit)

Tax-free

Remaining redundancy payment (any money above the tax-free limit), known as employment termination payment (ETP)

Taxed

Non-genuine redundancy payment

Taxed

The redundancy payments page on the ATO website can be a good starting point to find out how different components of your redundancy payment are likely to be taxed.

Alternatively, you may want to speak with a tax adviser when lodging your tax return.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. 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 agent or 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.