How Is Redundancy Pay Taxed in Australia? Genuine vs Non-Genuine Explained

Real talk — The ATO distinguishes between genuine and non-genuine redundancy, and the tax treatment is dramatically different. A genuine redundancy occurs when your employer decides your position is no longer required and terminates your employment.

You must not have been replaced, and the dismissal must not be related to your performance, conduct, or any arrangement between you and the employer. You must also be under Age Pension age at the time of dismissal. If your redundancy is genuine, a significant portion of the payment is tax-free.

If it's non-genuine — for example, if someone else is hired into your role, or if you're over Age Pension age — the entire payment is taxed as an employment termination payment (ETP) with less favourable tax treatment. Voluntary redundancy can still qualify as genuine if the employer's decision to reduce staff was genuine.

For genuine redundancy payments in 2025-26, the tax-free amount consists of a base limit plus an amount for each completed year of service. The base limit is approximately $12,524, and the per-year amount is approximately $6,262 per completed year of service.

So for an employee with 10 completed years of service, the tax-free component is approximately $12,524 + ($6,262 x 10) = $75,144. Any amount above this tax-free limit is treated as an employment termination payment and taxed at concessional ETP rates. These limits are indexed annually.

One thing people miss: The tax-free amount only applies to the genuine redundancy component of the termination payment — other components such as unused annual leave and long service leave are taxed separately under their own rules. Unused annual leave is typically taxed at a maximum of 32%, while long service leave accumulated after 16 August 1978 is also taxed at a maximum of 32%.

The portion of a genuine redundancy payment that exceeds the tax-free limit, plus the entire payment from a non-genuine redundancy, is taxed as an ETP. ETPs receive concessional tax treatment up to a cap (approximately $235,000 for 2025-26).

The tax rates depend on the components of the ETP and the recipient's age. For recipients below Age Pension age, the rate on the taxed component is a maximum of 32% (including Medicare levy) up to the ETP cap, and the marginal tax rate on any amount above the cap. For recipients at or above Age Pension age, the rate is a maximum of 17% (including Medicare levy) up to the ETP cap.

These concessional rates are significantly lower than the top marginal rate of 47%, providing meaningful tax savings for larger payouts. The ETP must be paid within 12 months of termination to qualify for concessional treatment.

When you're made redundant, any accrued but untaken annual leave and long service leave is paid out and taxed separately from the redundancy payment. Unused annual leave is taxed at a maximum of 32% (including Medicare levy) if the termination is a genuine redundancy.

Heads up — For non-genuine terminations, unused annual leave is added to your regular taxable income and taxed at your marginal rate (which could be up to 47%). Unused long service leave follows different rules depending on when it accrued. Leave accrued before 16 August 1978 is fully tax-free.

Leave accrued between 16 August 1978 and 17 August 1993 — only 5% is included in taxable income. Leave accrued after 17 August 1993 is fully assessable but taxed at a maximum of 32% for genuine redundancies. These rules are complex, and a tax accountant can ensure each component is correctly treated.

Under the National Employment Standards, employees with at least one year of continuous service are entitled to statutory redundancy pay based on their length of service. The NES redundancy scale is: 1-2 years — 4 weeks pay; 2-3 years — 6 weeks; 3-4 years — 7 weeks; 4-5 years — 8 weeks; 5-6 years — 10 weeks; 6-7 years — 11 weeks; 7-8 years — 13 weeks; 8-9 years — 14 weeks; 9-10 years — 16 weeks; 10+ years — 12 weeks (the reduction from 16 to 12 weeks after 10 years is a common point of confusion).

These are minimum entitlements — many awards, enterprise agreements, and employment contracts provide more generous redundancy terms. Small businesses (fewer than 15 employees) may be exempt from the NES redundancy scheme. Employees of businesses that have been wound up or become insolvent may access the Fair Entitlements Guarantee for unpaid redundancy.

Use our Redundancy Tax Calculator to estimate the tax payable on your redundancy payment. Enter your total redundancy amount, years of service, age, and whether the redundancy is genuine, and the calculator will break down the tax-free component, ETP tax, and tax on unused leave.

This bit matters. Understanding the tax treatment before accepting a redundancy package is essential for financial planning. In some cases, you may be able to negotiate the structure of the payment — for example, having a larger component classified as a genuine redundancy payment rather than an ex-gratia bonus can significantly reduce the tax. If you've received or expect to receive a redundancy payment, consulting a tax adviser is strongly recommended given the complexity of the rules. Keep that in mind.