Are redundancy payments taxed? Here’s how you know

 In Tax

Understanding how your redundancy payout is taxed can help you make the most of it.

If you’ve recently been made redundant, it’s important to understand how you’ll be taxed so you can make the most of your redundancy payment.

You may be entitled to receive concessional tax treatment that wouldn’t otherwise be available if you left your job for other reasons.

Understanding redundancy payments

For tax purposes, the Australian Taxation Office (ATO) treats payments received upon termination of employment differently, depending on the type of payment received. In particular, a ‘genuine redundancy’ payment is taxed differently to other termination payments.

You don’t normally have to pay tax on a payment that meets the ATO’s definition of a genuine redundancy, up to a tax-free limit. The tax-free limit, which changes every year, is a base amount, plus an amount for each complete year of service with your employer. Any remaining genuine redundancy payment is taxed at concessional tax rates up to a capped limit, which is indexed annually (the ETP cap).

Generally, a redundancy is considered ‘genuine’ if it meets the following criteria:

  • You’re dismissed because your employer no longer requires the job you were doing as part of its business or structure; and
  • You’re under the normal retirement age

A termination payment won’t be considered as a genuine redundancy payment if:

  • You left your job because you reached retirement age
  • You chose to resign
  • Your employer terminated your job contract
  • Your employer dismissed you because of disciplinary or competency issues

What counts as a ‘genuine’ redundancy payment?

In the event of a genuine redundancy, depending on your employment agreement, here are some examples of amounts that may be included as part of a concessionally-taxed genuine redundancy payment, and amounts that may not:

Since your termination payment may consist of a few of these components, it can be helpful to know about the different tax treatment for each component.

Here’s a summary of which components are taxable and which aren’t:

To find out more about the Tax treatment of a redundancy payment, call Adam and the team on 03 9988 7777, we are here to help.

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