Navigating a voluntary redundancy offer can feel daunting because the tax outcomes depend on rules that are easy to misunderstand. This guide walks through those rules in plain Australian English so you can see how much of your payout will be completely tax free, how much falls under the concessional Employment Termination Payment cap and what finally lands in your assessable income.
Voluntary versus genuine redundancy and why the distinction shapes your tax outcome
A voluntary redundancy happens when an employer invites employees to leave with a payout and the employee chooses to accept. For tax purposes the ATO looks past the word voluntary and asks a different question. Was the job itself abolished so that it no longer exists. If the answer is yes and the departing employee is below age pension age then the payment is treated as a genuine redundancy. That unlocks a tax free base amount plus an extra amount for each completed year of service.
If the job is not genuinely abolished, if the role will be refilled quickly, if the employee is at or above age pension age or if the departure is really a resignation disguised as redundancy then the payment is not a genuine redundancy. In that case everything is taxed either as an Employment Termination Payment or as ordinary income.
The employer needs to document that the role is gone and cannot make an arrangement to rehire the employee in a similar capacity. The ATO can and does check these facts especially when large sums are involved. Both employer and employee should keep evidence of the restructure that led to the package.
The tax free base and per year amount for genuine redundancy
A genuine redundancy payment enjoys a tax free component calculated by a simple formula that combines a base figure and a service figure. The figures are indexed on 1 July each year.
How the limit is calculated in practice
The tax free component equals the indexed base figure plus an extra amount multiplied by the number of completed years of service. Part years do not count so an employee with five years and eleven months of service is taken to have five completed years for the purpose of this formula.
The entire amount produced by the formula is non assessable non exempt income. It will show on your income statement or PAYG summary as Lump Sum D and it is excluded from your taxable income and therefore from your marginal tax rates.
Current indexed figures for the two most recent income years
| Income year | Base tax free amount | Extra amount for each completed year |
|---|---|---|
| 2025-26 | 13,100 | 6,552 |
| 2026-27 | 13,598 | 6,801 |
Imagine an employee who has worked ten completed years and whose position is abolished in June 2027. The tax free limit for that person is 13,598 plus 10 times 6,801 which equals 81,608. If the redundancy payout is 120,000 then 81,608 will be entirely tax free. The remaining 38,392 will be dealt with under the Employment Termination Payment rules discussed next.
What becomes an Employment Termination Payment and why the cap matters
When a genuine redundancy payment exceeds the tax free limit the excess becomes an Employment Termination Payment or ETP. Other payments made because employment ends can also be ETPs. These include golden handshakes, certain ex gratia amounts and some bonuses paid on termination. ETPs attract concessional withholding provided the sum does not exceed the relevant cap in the year of payment.
The two caps that can apply to an ETP
Two caps exist and the ATO requires you to compare both. The ETP cap is indexed each year. The whole of income cap is fixed at 180,000 less your other taxable income in the same income year. You receive the lower of the two caps. For most taxpayers the ETP cap will be the binding limit unless they earn very high other income in the same year.
The ETP cap amounts for recent income years are below.
| Income year | ETP cap amount |
|---|---|
| 2025-26 | 260,000 |
| 2026-27 | 270,000 |
How age at termination alters the tax rate applied to the ETP within the cap
| Age at termination | Tax rate on ETP up to the cap (plus 2 percent Medicare levy) | Tax rate on ETP amount that exceeds the cap |
|---|---|---|
| Under preservation age | 32 percent | 45 percent |
| Preservation age or older but below age pension age | 17 percent | 45 percent |
Preservation age ranges from 55 to 60 depending on date of birth. Age pension age is currently up to 67. Employees at or above age pension age cannot receive a genuine redundancy payment so for them the entire package will be taxed as an ETP or as ordinary income without any tax free portion.
Which parts of a redundancy payout are assessable income and which are not
A voluntary redundancy package often contains several elements. Understanding what goes where on the tax return is just as important as knowing the rates.
Non assessable non exempt components
The portion calculated under the genuine redundancy formula is completely outside the tax system for the employee. It is reported by the employer but it never enters taxable income.
ETP components that are taxed at concessional flat rates
The part above the tax free limit that fits within the ETP cap is taxed at either 17 percent or 32 percent depending on age as shown in the earlier table. The employee does not include that sum as ordinary income on the tax return. Instead it is shown in the ETP section of the return and the tax withheld by the employer is final unless the cap is exceeded.
If the package exceeds the cap the excess is still reported as an ETP but is taxed at 45 percent plus Medicare levy. Again it is not ordinary income for marginal rate purposes but the higher withholding reflects the loss of concession.
Ordinary assessable income items that do hit marginal tax rates
| Payment type | Tax treatment | Appears in assessable income |
|---|---|---|
| Unused annual leave | Special withholding rules that approximate marginal rates | Yes |
| Unused long service leave | Special withholding rules that approximate marginal rates | Yes |
| Outstanding salary or wages | Marginal rates | Yes |
| Post termination bonus that is not an ETP | Marginal rates | Yes |
Unused leave payments receive a slightly lower withholding rate when the service period began before 18 August 1993 but they are still included in taxable income. Superannuation guarantee does not apply to these amounts and they do not count toward concessional contribution caps.
Worked example medium package under preservation age
Angus is 45 years old, well under preservation age. He has worked for the same employer for 10 completed years. His role is abolished and he accepts a voluntary redundancy offer in the 2026-27 income year.
Details of the payout Base redundancy amount 90,000 Unused annual leave 14,000 Unused long service leave 6,000 Outstanding salary 4,000
Step one Calculate the tax free limit. Limit equals 13,598 plus 10 times 6,801 which yields 81,608.
Step two Split the redundancy amount. Of the 90,000, an amount of 81,608 is tax free. The balance of 8,392 becomes an ETP.
Step three Check the ETP caps. Angus has no other ETPs this year. The relevant ETP cap is 270,000. The whole of income cap is 180,000 minus other taxable income. His salary for the part year before redundancy is 60,000 so the whole of income cap for him is 120,000. The lower of 270,000 and 120,000 is 120,000, well above the 8,392 excess, so the entire ETP portion receives concessional treatment.
Step four Apply the age related rate. Because Angus is under preservation age the 8,392 is taxed at 32 percent plus 2 percent Medicare levy. The employer withholds 2,850 and reports the ETP on Angus’s income statement with the R code for genuine redundancy.
Step five Handle the leave and salary amounts. The 14,000 and 6,000 are included in assessable income. The employer withholds using the leave termination schedule which gives a rate close to marginal tax. The outstanding salary of 4,000 is ordinary income subject to PAYG withholding.
Outcome summary Angus receives 81,608 completely tax free. Angus pays flat ETP tax on 8,392. Angus includes 24,000 of leave and salary in his assessable income and these amounts are taxed at his marginal rate when he lodges his return.
Worked example large package that breaches the cap
Belinda is 57 which places her above preservation age but below age pension age. She has 22 completed years of service. Her payout in 2026-27 is 450,000 made up solely of redundancy money, no unused leave.
Step one Tax free limit 13,598 plus 22 times 6,801 equals 163,220. That portion is tax free.
Step two Excess becomes ETP The excess is 286,780.
Step three Determine the applicable cap Belinda has no other taxable income this year yet. The ETP cap is 270,000. The whole of income cap is 180,000. Because 180,000 is lower, the concessional portion of the ETP is limited to 180,000.
Step four Split the excess into within cap and above cap Within cap 180,000. Above cap 106,780.
Step five Apply tax rates Within cap portion is taxed at 17 percent plus 2 percent Medicare levy. Above cap portion is taxed at 45 percent plus 2 percent Medicare levy.
Step six Reporting The employer will show two ETP amounts in Belinda’s income statement. The within cap sum will have the R code. The above cap sum will have the O code. Both are not ordinary income for marginal rate purposes but the withholding already applied is substantial.
Belinda can see that breaching the cap lifted the effective tax on part of her payout to the top marginal rate. Had her employer offered the option to split the payment over two income years it might have been possible to use a fresh cap in the second year but the rules around such structuring are complex and professional advice would be essential.
Timing reporting and traps the ATO watches for
The concessional treatment of an ETP is only available when the payment is made within 12 months of termination. Payments made after that period are still income but they lose the ETP concessions and are often taxed at marginal rates.
Employers must report through Single Touch Payroll. The tax free genuine redundancy amount is labelled Lump Sum D. The ETP is shown separately with a code that indicates the reason for termination. Errors in coding can lead to extra tax or refunds being delayed so employees should check their income statement carefully.
Common mistakes include assuming the entire payout is tax free, forgetting that leave is assessable income and misclassifying a voluntary resignation as a genuine redundancy. Another trap is the age test because a worker at or above age pension age cannot receive a genuine redundancy payment at all. Finally, large packages that exceed the ETP cap are sometimes overlooked, leading to insufficient withholding and a surprise tax bill later.
When personal advice becomes critical
A voluntary redundancy may be the largest lump sum you ever receive outside of super. If you are close to preservation age or age pension age, if your payment risks breaching the ETP cap, if you have other income such as a bonus or investment windfall in the same year, or if you are considering directing part of the payment into super, the interaction of multiple caps and contribution limits can be complex. A qualified tax adviser can model the after tax outcomes and help you avoid avoidable tax at 45 percent.
Frequently asked questions
Is a voluntary redundancy payment always tax free in Australia
No. Only the genuine redundancy component up to the indexed limit is tax free. Anything above that limit is taxed either as an Employment Termination Payment or as ordinary income depending on its nature.
How do I calculate the tax free portion of my redundancy
Add the base figure for the relevant income year to the service figure multiplied by your number of completed years with the employer. The resulting number is fully tax free provided your departure qualifies as a genuine redundancy.
What is the Employment Termination Payment cap for the 2026 27 income year
The indexed ETP cap for 2026 27 is 270,000. The amount of your ETP that can receive concessional rates is the lower of that figure and the whole of income cap which is 180,000 less your other taxable income in the year.
Do unused annual leave and long service leave form part of the ETP
No. They are separate termination payments taxed under different rules and they are included in your assessable income.
Can I roll my redundancy payment into super to save tax
Part of an ETP may be able to be contributed to super under the personal concessional or non concessional caps provided other eligibility conditions are satisfied. The rules are strict and the interaction with contribution caps means you should seek tailored advice before attempting any rollover.
Will the tax free component show on my tax return
The tax free genuine redundancy amount is reported to the ATO but it does not appear in your taxable income. You will see it in your prefill data as Lump Sum D but it is non assessable non exempt income.
What happens if my employer pays me more than 12 months after I leave
A payment made outside the 12 month period cannot be treated as an ETP in most cases. Instead it will be taxed at marginal rates and may also affect eligibility for certain Centrelink payments.
Final word on maximising the after tax value of a voluntary redundancy
The combination of tax free base amount, concessional ETP cap and ordinary assessable elements means that two employees with the same gross package can face very different tax bills. Understanding the rules before you sign your acceptance can help you structure timing, consider super contributions and avoid breaching caps. The figures in this guide are correct for the 2025-26 and 2026-27 income years. Thresholds change each 1 July so always confirm the latest numbers on the ATO website or with a qualified adviser before making any decision.
