Redundancy Payment Australia: Tax and Super Rules Explained (2026)

Quick Answer

Genuine redundancy payments up to the ATO tax-free limit are not taxed — $12,524 plus $6,264 per completed year of service (2025–26 figures). Amounts above that cap are taxed as an employment termination payment (ETP) at concessional rates. Super is generally not paid on redundancy payments themselves, but any owed super on regular earnings must be paid out in full.

What Counts as a Genuine Redundancy Payment?

The ATO draws a hard line between a genuine redundancy and other terminations. A genuine redundancy occurs when an employer eliminates a job — not just replaces the person doing it. The position must no longer exist after the employee leaves, the dismissal cannot be used as a way to get around unfair dismissal laws, and the employer must have followed consultation obligations under any applicable Modern Award or enterprise agreement. Fair Work Act 2009 requirements around consultation with affected employees also apply in most cases.

If the ATO determines the redundancy was not genuine — for example, the same role was advertised two months later — the tax-free component disappears. The entire payment then becomes an ETP taxed at ordinary rates, which is a significant difference for the employee. Employers who incorrectly classify a termination as genuine redundancy also face potential penalties from both the ATO and Fair Work Australia.

A payment also cannot qualify as a genuine redundancy if the employee is over Age Pension age at the time of dismissal (currently 67 for most Australians). In that situation, the payment is treated as an ETP from the start. Always verify age eligibility before applying the tax-free formula.

The Tax-Free Limit: 2025–26 ATO Figures

Each income year the ATO publishes updated thresholds for the genuine redundancy tax-free amount. For 2025–26, the base amount is $12,524 and the per-year-of-service amount is $6,264. That means an employee with 5 completed years of service has a tax-free threshold of $12,524 + (5 × $6,264) = $43,844. Only whole completed years count — a year and eight months rounds down to one year.

Anything paid under the genuine redundancy label up to that cap is received completely tax-free. The employee does not include it in their tax return, and the employer does not withhold PAYG from it. This is one of the most valuable tax concessions available to Australian workers, and it is worth calculating precisely before processing the final payslip.

Amounts above the tax-free cap do not simply get taxed at the employee's marginal rate. They fall into the employment termination payment (ETP) system, which has its own concessional tax rates — covered in the next section. The key point for employers: you need to calculate the tax-free portion first, then apply ETP withholding rules to the remainder.

How Employment Termination Payments (ETPs) Are Taxed

The portion of a redundancy payment that exceeds the tax-free limit becomes an employment termination payment. ETPs are split into two types: life benefit ETPs (paid to a living employee) and death benefit ETPs (paid to a deceased estate). For a standard redundancy, you are dealing with a life benefit ETP. These are taxed at a maximum rate of 32% (including Medicare levy) if the payment falls within the ETP cap — which is $245,000 for 2025–26.

If the employee's ETP plus their taxable income in the same year exceeds the whole-of-income cap ($180,000 for 2025–26), the excess is taxed at 47% — the top marginal rate plus Medicare levy. This whole-of-income cap catches high earners who would otherwise benefit from the concessional ETP rate despite having no need for it. Employers must calculate this carefully or risk under-withholding, which becomes their liability under PAYG rules.

The tax rates for life benefit ETPs also depend on the employee's age. Employees under preservation age (60 for most people born after 1 July 1964) pay 32% on the taxable component. Employees at or above preservation age but under 60 pay 17%. Those aged 60 and over pay 0% on the taxable component up to the ETP cap. This age-banding means the same ETP amount can result in materially different net payouts depending on when the employee was born.

Leave Payouts: Annual Leave, Long Service Leave, and Notice

Leave payouts on termination are taxed separately from the genuine redundancy component and the ETP — and they are not part of the tax-free threshold calculation. Unused annual leave paid out on genuine redundancy is taxed at a maximum rate of 32% (including Medicare levy) regardless of the employee's normal marginal rate. This concessional rate only applies to genuine redundancy; if the termination is not genuine, annual leave is taxed at marginal rates.

Long service leave is more complex. If the employee accrued long service leave before 16 August 1978, different rules apply to that portion. For leave accrued after that date, long service leave paid out on termination is generally taxed at marginal rates, not concessionally. Some states — including New South Wales, Victoria, and Queensland — have their own long service leave laws that govern entitlement amounts, so check the relevant state legislation as well as the ATO rules.

Payment in lieu of notice is treated as ordinary income and taxed at the employee's marginal rate — no concessions apply. It is not part of the ETP and not part of the redundancy tax-free amount. Employers often bundle all termination payments into one final pay, but the payslip must clearly itemise each component so the correct withholding can be applied to each line.

Does Super Apply to Redundancy Payments?

Superannuation guarantee (SG) does not apply to genuine redundancy payments themselves. Under the Superannuation Guarantee (Administration) Act 1992, SG is calculated on ordinary time earnings (OTE), and a genuine redundancy payment is not OTE. The same applies to ETPs — they are excluded from the SG base. So if an employee receives a $60,000 genuine redundancy payment, no super is owed on that $60,000.

However, employers must pay all superannuation that is owed on regular wages and any included annual leave up to the date of termination. This is where many small business owners get caught. If an employee was earning super at 11.5% during their last pay period and you have not yet remitted it, that outstanding super must be paid — and from 1 July 2026, under Payday Super, it must be paid on the same day as or within a very short window of the relevant payroll. Carrying outstanding super into a redundancy settlement creates immediate non-compliance exposure.

For employers processing redundancies in the next few weeks: with Payday Super commencing 1 July 2026 — just 16 days away — now is the time to reconcile every employee's super ledger. Any SG shortfall that exists at the point of redundancy should be paid immediately. Employers who are behind on super contributions will face the Superannuation Guarantee Charge (SGC), which includes interest and an administration fee and is not tax-deductible, unlike normal super contributions.

What Employers Must Do: Payroll Steps for Redundancy

Start with a written calculation of the tax-free genuine redundancy amount using the ATO's 2025–26 thresholds. Document the employee's start date, end date, and completed whole years of service. Calculate the total redundancy payment, subtract the tax-free amount, and classify the remainder as an ETP. Determine the employee's age to apply the correct ETP withholding rate. This calculation should be done before the final payslip is generated — not after.

Issue a detailed payslip that itemises every component separately: final wages, unused annual leave, payment in lieu of notice (if applicable), the tax-free genuine redundancy amount, and the ETP. Each line needs its own withholding amount shown clearly. Under Single Touch Payroll Phase 2, each income type must be reported with the correct income stream code. Genuine redundancy and ETP components have specific STP codes — use them correctly or the employee's prefilled tax return will show the wrong figures.

Remit all outstanding super before or on the employee's final payday. If the redundancy falls after 1 July 2026, Payday Super rules mean the super on any final ordinary time earnings must be paid the same day. Provide the employee with their separation certificate if they request one for Centrelink purposes, and keep all redundancy calculation records for at least five years in case of an ATO audit or Fair Work dispute.

SAB Account AI calculates redundancy withholding, itemises every termination component on your payslip, and keeps your STP reporting compliant — try it free before Payday Super kicks in on 1 July 2026.

SAB Account AI — ATO-compliant invoicing and payslips for Australian small businesses. From $9/mo.

Is redundancy pay taxable in Australia?

Genuine redundancy payments up to the ATO's tax-free limit are completely tax-free — $12,524 plus $6,264 per completed year of service in 2025–26. Amounts above that cap are taxed as an ETP at concessional rates between 0% and 32% depending on age. Non-genuine redundancies lose all concessional treatment and the full payment is taxed at marginal rates.

Do I get super on a redundancy payment?

No — super guarantee does not apply to the genuine redundancy payment itself or to ETPs. However, your employer must pay all outstanding super owed on your regular wages up to the date your employment ends. Check your MyGov account after termination to confirm the super was actually received by your fund.

What is the tax-free redundancy amount for 2025–26?

The ATO's 2025–26 figures are $12,524 as a base amount, plus $6,264 for each completed year of service. So 10 full years of service gives a tax-free threshold of $75,164. Only whole completed years count — partial years are excluded from the calculation.

How is unused annual leave taxed when I am made redundant?

Unused annual leave paid out on genuine redundancy is taxed at a maximum concessional rate of 32% including Medicare levy, regardless of your normal marginal rate. This is more favourable than the ordinary income tax rate for most employees. Long service leave is taxed differently and depends on when it was accrued.

What if my employer says the redundancy is genuine but re-advertises my job?

If your role is re-created within a short period, the ATO may reclassify the termination as non-genuine and remove the tax-free concession. You can also lodge a complaint with Fair Work Australia if you believe the redundancy was used to avoid unfair dismissal protections. Document everything — the job ad, timing, and any internal communications — as evidence if needed.

Related: How To Pay Super Employees Australia · Payday Super 2026 · Payslip Requirements Australia · Casual Employee Payroll Australia · Payg Withholding Calculator Australia