Tax on Redundancy Pay and Termination Payments (2026–27)

Updated 2026-10-04 · Reviewed against official government sources

A genuine redundancy payment is tax-free up to $13,598 plus $6,801 for each completed year of service in 2026–27 ($13,100 plus $6,552 in 2025–26). Anything above that becomes an employment termination payment (ETP), taxed at 32% if you are under preservation age (60) or 17% if you have reached it, both including the Medicare levy, up to the ETP cap of $270,000. Unused annual and long service leave are taxed separately. This guide explains each part with a worked example, the codes on your income statement, and how back pay shown as Lump sum E is handled.

When is a redundancy "genuine" for tax?

The ATO treats a payment as a genuine redundancy payment when your job is abolished, your employment is terminated because of that, and you are under age-pension age on the day of dismissal. Under the 2019 change, age-pension age replaced the old age-65 limit. A redundancy can still be genuine if your employer asked for expressions of interest before choosing whom to dismiss, as long as the decision to end the job was the employer's.

It is not a genuine redundancy if you leave voluntarily, your contract ends, you are dismissed for disciplinary or inefficiency reasons, you are dismissed because you reached normal retirement age, or you are already age-pension age (67 if born on or after 1 January 1957). The Fair Work Ombudsman applies a separate test for genuine redundancy, used for unfair dismissal: the job no longer needs to be done by anyone because of changes in the business, and the employer followed the consultation requirements in the award or enterprise agreement. Meeting one test does not guarantee meeting the other.

The tax-free limit on genuine redundancy pay

The tax-free amount is a base amount plus a service amount for each completed year with the employer, indexed every 1 July. It covers severance pay, a gratuity or golden handshake, and payment in lieu of notice that forms part of the redundancy package. It does not cover wages owing, unused annual or long service leave, or payments in lieu of super. The tax-free part is reported at Lump sum D and is not assessable income, so no tax or Medicare levy is paid on it.

Completed years of service	2025–26 tax-free limit	2026–27 tax-free limit
1	$19,652	$20,399
5	$45,860	$47,603
10	$78,620	$81,608
15	$111,380	$115,613
20	$144,140	$149,618
30	$209,660	$217,628

How the taxable part (the ETP) is taxed

Whatever exceeds the tax-free limit is the taxable component of an ETP. Redundancy, early retirement scheme, invalidity and some compensation payments are "excluded" payments, taxed concessionally up to the ETP cap: $260,000 in 2025–26 and $270,000 in 2026–27. Other ETPs, such as golden handshakes on resignation, non-genuine redundancy, payment in lieu of notice and unused sick leave, are "non-excluded" and get the lower of the ETP cap and the whole-of-income cap. The ATO describes the whole-of-income cap as $180,000 minus your other taxable income for the income year, and it is not indexed.

Your age	Rate up to the cap (incl. Medicare)	Rate above the cap
Under preservation age (60)	32%	47%
Reached preservation age	17%	47%

Worked example: a 2026–27 redundancy

Daniel is made genuinely redundant in 2026–27 after 12 completed years and receives a $150,000 redundancy package (excluding leave). His tax-free limit is $13,598 + 12 × $6,801 = $95,210. The remaining $54,790 is an excluded ETP, well under the $270,000 ETP cap.

If Daniel is under 60, tax on the ETP is $54,790 × 32% = $17,533, leaving $132,467 of the $150,000 after tax. If he is 60 or older, the rate is 17%, the tax is $9,314 and he keeps $140,686. His employer withholds at these rates under Schedule 11. Because the cap that applies is the ETP cap, not the whole-of-income cap, his salary earlier in the year does not affect the rate.

Timing matters in two ways. The ATO says you usually get the lower ETP rates only if you receive the payment within 12 months of termination (the 12-month rule). And you cannot roll an ETP over into super, so the concessional rates above are the only tax relief on it.

Unused annual leave and long service leave

Lump sums for unused annual leave, leave loading and long service leave are not part of the ETP. On a genuine redundancy, invalidity or approved early retirement scheme, the ATO's Schedule 7 (from 1 July 2026) sets withholding at 32% for annual leave and leave loading accrued at any date, and for long service leave accrued after 15 August 1978. These are reported at Lump sum A. Long service leave accrued before 16 August 1978 is reported at Lump sum B, and only 5% of it is taxable.

On a normal termination (resignation, retirement or dismissal for inefficiency), leave accrued after 17 August 1993 is simply taxed at marginal rates with your salary. Unused sick leave is not paid out under the National Employment Standards. If your agreement does pay it, it is a non-excluded ETP, as are unused rostered days off.

ETP codes on your income statement

The code tells the ATO which cap to apply. It pre-fills in myTax; if it is missing, ask the employer.

Code	Used for
R	Early retirement scheme, genuine redundancy, invalidity, or compensation for personal injury, unfair dismissal, harassment or discrimination (ETP cap only)
O	Anything not covered by R, such as a golden handshake, gratuity, payment in lieu of notice, unused sick leave or rostered days off (smaller of the two caps)
S	A code R payment where another ETP for the same termination was paid in an earlier income year
P	A code O payment where another ETP for the same termination was paid in an earlier income year
D	Death benefit ETP paid to a death benefits dependant
B / N	Death benefit ETP paid to a non-dependant (B if another was paid in an earlier year, otherwise N)
T	Death benefit ETP paid to the trustee of a deceased estate (goes in the estate's return)

Lump sum E: back payments for earlier years

Lump sum E is income that relates to earlier income years but was paid to you this year, typically back pay after an underpayment is corrected. It is taxed in the year you receive it; do not amend earlier returns. Your income statement in ATO online shows the amount for each year (Lump sum payment E and Lump sum E financial year), and myTax asks for the breakdown for up to the 5 most recent years. myTax only captures the 10 most recent years; older arrears need a paper return.

If the arrears (for wages, those accrued more than 12 months before payment) are at least 10% of your threshold test income for the year, the ATO considers you for a lump sum in arrears tax offset, a Medicare levy exemption on the arrears (from 1 July 2024) and an MLS offset. They reduce the extra tax, Medicare levy and surcharge caused by receiving several years' income at once. The ATO calculates them for you; the myTax estimate does not include them.

Early retirement schemes ("planned retirement")

A payment under an early retirement scheme gets the same tax-free limit as a genuine redundancy, but only if the ATO has approved the scheme, by class ruling, before it starts. Schemes are generally approved when they are offered to a broad class of employees (all staff, or those of a certain age or skill) as part of a plan to reorganise the business, such as closing or relocating part of it or introducing new technology. Ask your employer for the class ruling number. Without one, a package for leaving voluntarily is generally a non-genuine redundancy and taxed as an ordinary (non-excluded) ETP.

Related calculators & guides

Frequently asked questions

Is redundancy pay taxed at 32%?

Only the part above the tax-free limit, and only if you are under preservation age. In 2026–27 the first $13,598 plus $6,801 per completed year is tax-free; the excess is taxed at 32% (or 17% at 60 and over) up to the ETP cap.

Can I roll my redundancy payment into super?

No. The ATO says ETPs made after 30 June 2007 (other than under the old transitional arrangements) cannot be contributed to or rolled over into super. The taxable part is taxed at the ETP rates when it is paid.

Is my notice pay part of my redundancy?

Payment in lieu of notice paid because of a genuine redundancy can form part of the genuine redundancy payment and share the tax-free limit. On a non-redundancy termination it is a non-excluded ETP (code O).

Do I need to include the tax-free part in my tax return?

No. The ATO says you do not need to declare the amount shown at Lump sum D (the tax-free component of a genuine redundancy or early retirement scheme payment). It is not assessable income.

Does super get paid on redundancy pay?

Generally no. Under the ATO's qualifying earnings rules from 1 July 2026, severance pay, genuine redundancy payments and unused leave paid on termination do not attract super guarantee. Payment in lieu of notice does, for all termination reasons.

Sources

Figures are taken from official government publications and were last reviewed on 2026-10-03.