What is the tax treatment of redundancy payments in Australia 2026?
A portion of your redundancy payment in Australia is tax-free, up to a certain limit based on a base amount plus a service amount. The remainder is taxed concessionally as an Employment Termination Payment (ETP). Tax laws for 2026 are based on current legislation and may change.
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How it works in practice
Understanding Redundancy Payment Tax
In Australia, redundancy payments are generally treated differently from regular income for tax purposes. If your redundancy is a 'genuine redundancy', a significant portion of the payment can be tax-free up to a certain limit. This tax-free amount is calculated using a base amount plus an amount for each year of service. For the 2023-24 financial year, the tax-free limit was $12,098 plus $6,050 for each completed year of service, which is indexed annually. While specific amounts for 2026 are not yet released, the calculation method is expected to remain similar.
Employment Termination Payments (ETPs)
Any part of your genuine redundancy payment that exceeds the tax-free limit is considered an Employment Termination Payment (ETP). ETPs are taxed at a lower, concessional rate compared to your marginal tax rate, up to a certain cap. The ETP cap (which applies to the total of all ETPs you receive in a financial year) is also indexed annually. For amounts exceeding the ETP cap, the top marginal tax rate applies. It's crucial to distinguish genuine redundancy payments from other termination payments, such as unused annual leave or long service leave, which have their own tax treatments.
Important exceptions
Not all payments received upon termination are treated as genuine redundancy payments. Payments for unused annual leave, unused long service leave, or payments in lieu of notice have different tax treatments.
The tax-free component only applies to genuine redundancy payments. If the redundancy is not considered 'genuine' by the ATO (e.g., if you were dismissed for cause or immediately re-employed), the entire payment may be taxed as ordinary income.
Tax laws and thresholds are subject to change, especially for future financial years like 2026. Always check the Australian Taxation Office (ATO) website for the most current information or seek professional advice closer to the time of payment.
What you should do now
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Understand if your redundancy is 'genuine' according to ATO criteria to ensure eligibility for tax concessions.
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Calculate the tax-free component of your redundancy payment based on your years of service and the applicable annual indexation.
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Identify any amounts exceeding the tax-free limit, as these will be taxed as an Employment Termination Payment (ETP).
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Request a PAYG payment summary from your employer detailing all components of your termination payment.
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Consult with a registered tax agent or the ATO directly for personalized advice regarding your specific redundancy payment and the latest tax rules for 2026.
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