Payroll

Termination Pay Tax Australia: What Employers and Employees Must Know (2026)

15 June 2026 · 9 min read

Quick Answer

Termination pay tax in Australia depends on the payment type. Genuine redundancy payments have a tax-free threshold ($12,524 base + $6,264 per year of service in 2025–26). Employment termination payments (ETPs) are taxed at a maximum 32% concessional rate up to the cap ($235,000 in 2025–26). Unused annual leave and long service leave are taxed separately at either 32% or your marginal rate depending on when leave was accrued.

When employment ends — whether through redundancy, resignation, dismissal, or retirement — the final payout is rarely a single clean number. It is a mix of components, and the ATO taxes each one differently. Get the withholding wrong and the employee faces a surprise tax bill at EOFY, or you face an SGC penalty.

This guide is written for Australian small business owners, HR managers, bookkeepers, and employees who want to understand exactly how termination pay is taxed. We cover genuine redundancy, employment termination payments (ETPs), unused annual and long service leave, and the withholding calculations required under PAYG. All figures are for the 2025–26 financial year unless stated otherwise.

Note for employers: if you are processing a termination on or after 1 July 2026, the new Payday Super rules require superannuation to be paid within 7 days of each payday — including the final pay. That deadline is now 16 days away. Factor super into your termination calculation before the new rules take effect.

What Is Termination Pay? The Four Main Components

Termination pay is an umbrella term for everything paid when employment ends. It is not a single payment type — it is a bundle. Each component has its own tax treatment, its own withholding rate, and in some cases its own ATO payment summary label.

The four main components are: (1) ordinary final wages for hours worked up to the last day, (2) unused annual leave and long service leave, (3) employment termination payments (ETPs) such as redundancy, golden handshakes, or payments in lieu of notice, and (4) genuine redundancy payments that qualify for a tax-free threshold.

Ordinary final wages are taxed exactly like normal pay — PAYG withholding applies at the employee's marginal rate, and super is owed on those earnings. The complexity starts with the other three components. Employers must calculate each one separately and apply the correct withholding before issuing the final payslip.

ATO rule: You must report each payment type separately on the employee's income statement in Single Touch Payroll. Combining them into one lump sum is a common STP error.

The five categories of termination pay and their tax treatment:

Final wages for hours worked — taxed at marginal rate, super applies
Unused annual leave — taxed at 32% (pre-1993 accrual) or marginal rate (post-1993)
Unused long service leave — rate depends on accrual period and state law
Employment termination payments (ETPs) — taxed at concessional rate up to the cap
Genuine redundancy payments — tax-free up to the ATO threshold

Genuine Redundancy Payments: The Tax-Free Threshold Explained

A genuine redundancy payment is made when a job — not just the person — is eliminated. The ATO has strict criteria: the dismissal must be because the position is genuinely redundant, the employer must have complied with any applicable modern award or enterprise agreement consultation requirements, and the payment cannot be made to an employee who would have otherwise reached normal retirement age.

For 2025–26, the tax-free amount is $12,524 plus $6,264 for each completed year of service with that employer. So an employee with 5 years of service has a tax-free threshold of $12,524 + (5 × $6,264) = $43,844. Any genuine redundancy payment up to this amount is completely tax-free — no PAYG withholding, not included in assessable income.

Anything above the tax-free threshold is treated as an employment termination payment (ETP) and taxed accordingly. If the redundancy does not meet the ATO's genuine redundancy definition — for example, the employer fills the same role shortly after — the entire amount loses the tax-free status and is taxed as an ETP at the employee's marginal rate.

ATO check: The employee must be dismissed, not have resigned. Voluntary redundancy can still qualify as a genuine redundancy if all other criteria are met.

Employment Termination Payments (ETPs): Rates, Caps, and Withholding

An employment termination payment is a lump sum paid in connection with the end of employment. It includes payments in lieu of notice, gratuities, golden handshakes, compensation for loss of job, and the amount of a genuine redundancy payment above the tax-free threshold.

ETPs are taxed at concessional rates — but only up to the ETP cap, which is $235,000 for 2025–26. Below the cap, tax is withheld at 32% if the employee is under preservation age (60 for most people), or 17% if they are at or above preservation age. Both rates include the 2% Medicare levy. Above the $235,000 cap, the excess is taxed at the top marginal rate of 47% (including Medicare levy).

ETPs are split into two types by the ATO — life benefit termination payments (paid while the employee is alive) and death benefit termination payments (paid to a dependant or estate after death). Most small business terminations involve life benefit ETPs. These must be paid within 12 months of termination to attract the concessional rate. If paid later, the concessional rate is lost and the full marginal rate applies.

Payroll software must code ETPs separately in STP Phase 2. Using the wrong income type code will cause the ATO to misapply withholding on the employee's tax return.

ETP tax rates at a glance:

ETP cap 2025–26: $235,000
Tax rate under cap (under preservation age): 32% including Medicare levy
Tax rate under cap (at or above preservation age): 17% including Medicare levy
Tax rate above cap: 47% (top marginal rate + Medicare levy)
ETP must be paid within 12 months of termination to qualify for concessional rate

Unused Annual Leave and Long Service Leave: What Rate Applies?

Unused annual leave paid out on termination is taxed differently depending on when it was accrued. Leave accrued after 17 August 1993 is taxed at the employee's marginal rate — same as normal wages. Leave accrued before that date (rare in 2026, but relevant for long-serving employees) is taxed at a flat 32% including Medicare levy.

For unused long service leave, the rules are more layered. Leave accrued after 17 August 1993 in connection with a redundancy or early retirement is taxed at 32% (the concessional rate). In all other termination scenarios — resignation, dismissal — unused long service leave is taxed at the employee's marginal rate. Leave accrued before 16 August 1978 attracts a 5% flat rate. Leave accrued between 16 August 1978 and 17 August 1993 is taxed at 32%.

For most modern employees with employment starting after 1993, the practical rule is: unused annual leave at marginal rate, unused long service leave at marginal rate unless it is a genuine redundancy (then 32%). Employers should check the employee's start date carefully before processing the final payrun.

Fair Work reminder: Under the National Employment Standards, employees are entitled to have unused annual leave paid out on termination at the rate they would have received had they taken the leave. Do not pay it out at base rate only — include any regular loading or penalty rate that applied.

How to Calculate and Withhold PAYG on a Final Pay

PAYG withholding on final pay cannot be calculated the same way as a normal fortnightly or weekly pay. The ATO requires you to use the Schedule 7 — Tax table for unused leave payments on termination, and Schedule 11 — Tax table for employment termination payments. These are separate from the standard PAYG withholding tables.

Here is the calculation sequence: First, calculate the final ordinary wages for hours worked and withhold at the normal marginal rate using the employee's TFN declaration. Second, calculate unused annual and long service leave and apply the applicable rate from Schedule 7. Third, determine whether any ETP exists — payment in lieu of notice, redundancy amount above the tax-free threshold, etc. — and apply Schedule 11 rates. Fourth, confirm whether a genuine redundancy payment applies and exclude the tax-free threshold amount entirely from withholding.

The ATO's online tax withheld calculator handles these components if you enter them separately. Most payroll platforms (including SAB Account AI) split the payment types and apply the correct withholding automatically. If you are processing this manually, do not combine all components into one gross figure and apply a single marginal rate — that is almost always wrong and will result in either under-withholding (employee underpays tax) or over-withholding (employee is owed a refund they will wait months to receive).

5-step PAYG withholding process for final pay:

Step 1: Final ordinary wages — use standard PAYG withholding table
Step 2: Unused leave — use ATO Schedule 7
Step 3: ETP amounts — use ATO Schedule 11
Step 4: Genuine redundancy — exclude tax-free portion before applying Schedule 11
Step 5: Report each component separately in STP on the final submission

Super on Termination Pay: What You Owe (Especially from 1 July 2026)

Superannuation is not payable on all termination pay components. The Superannuation Guarantee applies only to ordinary time earnings (OTE). Genuine redundancy payments and ETPs are not OTE — no super is owed on these components. However, final wages for hours worked and any regular overtime where super has historically been paid are OTE, and super must be paid.

Unused annual leave paid on termination is generally not OTE and therefore not subject to super. This is confirmed in ATO SGR 2009/2. However, if your enterprise agreement or employment contract specifically includes leave loading as part of OTE, check carefully before excluding it.

This matters more than ever right now. From 1 July 2026 — 16 days away — the Payday Super rules require employers to pay super within 7 days of each payday, including the final pay. If you process a termination on or after 1 July 2026 and delay the super contribution, you will be in breach of the new rules and face the SGC plus an interest penalty of 11.5%. Process the final pay and the super contribution simultaneously, or set the super payment to run automatically on the same day as the final payrun.

Payday Super from 1 July 2026: Super on final ordinary wages must reach the employee's fund within 7 days of the final payday. Late payment = SGC liability. No grace period.

SAB Account AI calculates PAYG withholding on final pay automatically — splitting ordinary wages, unused leave, and ETPs into the correct ATO categories so your STP submission is right the first time.

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

Start free trial

Frequently asked questions

Is redundancy pay tax-free in Australia?

Genuine redundancy pay is partly tax-free up to the ATO threshold: $12,524 plus $6,264 per completed year of service in 2025–26. Any amount above the threshold is taxed as an employment termination payment at concessional rates. The tax-free amount only applies if the ATO's genuine redundancy criteria are met.

What tax rate applies to an employment termination payment (ETP)?

ETPs are taxed at 32% (including Medicare levy) for employees under preservation age, or 17% for those at or above preservation age — but only up to the $235,000 ETP cap. Above the cap, the excess is taxed at 47%. The ETP must be paid within 12 months of termination to access the concessional rate.

Do you pay super on termination pay?

Super is payable on final ordinary wages for hours worked, but not on genuine redundancy payments, ETPs, or unused annual leave. From 1 July 2026, Payday Super requires the contribution to reach the fund within 7 days of the final payday. Process the super payment on the same day as the final payrun to avoid SGC penalties.

How is unused annual leave taxed on termination?

Unused annual leave accrued after 17 August 1993 is taxed at the employee's marginal rate — the same as normal wages. Leave accrued before that date is taxed at a flat 32% including Medicare levy. The payment must be made at the rate the employee would have received had they taken the leave, including any applicable loading.

What is the difference between an ETP and a genuine redundancy payment?

A genuine redundancy payment meets specific ATO criteria (the job itself is eliminated, the employer followed consultation obligations) and receives a tax-free threshold based on years of service. Any amount above that threshold becomes an ETP. Not all ETPs are redundancy payments — they also include payments in lieu of notice, gratuities, and golden handshakes.