A letter lands on the kitchen table: “your position has been made redundant.” After decades with the same employer, the first response is rarely about money – it’s about identity, routine, what comes next. But once the shock settles, the practical question follows fast: how much of that payout will actually end up in the bank account, and how much will the tax office take?
For anyone made redundant in their sixties, the answer is more layered than a simple percentage. A genuine redundancy payment is not taxed as one lump sum – it is split into pieces, each governed by its own rules, and age plays a real part in how those pieces are treated. Understanding the order of operations before the payment arrives makes it far easier to read the paperwork when it does.
What makes a redundancy “genuine” in the tax office’s eyes
Not every payout labelled a redundancy qualifies for concessional tax treatment. The Australian Taxation Office (ATO) only treats a payment as a genuine redundancy for tax purposes when the employer has decided the job itself no longer exists, dismisses the employee on that basis, and the employee is below Age Pension age on the day of dismissal.
There’s a further condition that catches some people out: there must be no prior arrangement for the employee to be re-employed afterwards. A payment that fails any of these tests is treated as a non-genuine redundancy, and taxed under different rules entirely.
How much of the payout is actually tax-free
Where a redundancy does meet the genuine redundancy definition, part of the payment is tax-free. That tax-free limit is calculated as a base amount plus an additional amount for each completed year of service with that employer. Part years of service don’t count toward this calculation.
This tax-free component sits separately from everything else in the payout – it’s reported as its own lump sum on the employee’s income statement, not folded into the taxable component. The dollar figures making up the base amount and the per-year amount are indexed periodically, so the exact thresholds depend on the financial year in which the payment is made. Current figures are published on the ATO website.
What happens to the amount above the tax-free limit
Anything paid above the tax-free limit becomes an employment termination payment, known as an ETP. This portion is taxed concessionally up to what the ATO calls a whole-of-income cap, with the tax offset rate depending on whether the employee has reached preservation age – the age, generally between 55 and 60 depending on date of birth, at which superannuation can start to be accessed.
Once the amount paid exceeds the relevant ETP cap, the concessional rate stops applying and the excess is taxed at the top marginal rate instead. The specific dollar caps and offset rates are set for each financial year, so they’re worth confirming against the ATO’s current published figures rather than a previous year’s payslip.
Why age 60, preservation age and Age Pension age all matter
Age Pension age, rather than a fixed number like 65, is now the cut-off that determines whether concessional treatment applies at all. This wasn’t always the case. The law changed in 2019, extending concessional tax treatment for genuine redundancy and early retirement scheme payments from the previous age-based limit of 65 to Age Pension age, effective for payments made to employees dismissed or retiring on or after 1 July 2019.
The practical effect is that someone still working past 65 can remain eligible for genuine redundancy tax-free treatment, provided they are still under Age Pension age on the day of dismissal. But the reverse also holds: once an employee has already reached Age Pension age at the time of dismissal, the payment cannot be classed as a genuine redundancy under the ATO’s definition at all – a detail that can affect the timing of any decision about when to leave a role.
What doesn’t get the tax-free treatment
Not everything in a final payout benefits from the redundancy rules. Unused annual leave and long service leave are taxed under their own separate rules and don’t become tax-free simply because the termination happens to be a redundancy. These amounts sit alongside, not inside, the tax-free redundancy component and the ETP.
It’s also worth remembering that an arranged return to work after the redundancy can disqualify the whole payment from concessional treatment, since it undermines the basic premise that the job itself has ceased to exist.
Where to check the figures that apply to your own payment
Because the tax-free limit and ETP caps are indexed and tied to the financial year of payment, the numbers that applied to a colleague made redundant a year or two earlier may not match today’s figures. The ATO publishes the current thresholds on its website, and an employer’s income statement or payment summary will show exactly how each component of a payout has been reported. For anyone weighing up the timing of a redundancy or early retirement scheme offer, the ATO and MoneySmart are the places to confirm the figures that apply to that specific date.
None of this changes the reality of losing a job later in a career, but it does mean the payment on the way doesn’t have to arrive as a mystery. Once the tax-free component, the ETP and any leave payments are seen as three separate lines rather than one number, the letter on the kitchen table becomes something that can be read calmly, line by line, with the right questions ready for the ATO or a financial adviser before any decision is made.
