How is a redundancy payout taxed in Australia?
A genuine redundancy can land a big lump sum in your account — but not all of it is taxed the same way. Here is how the tax-free limit, the ETP cap and your leave payout actually work in 2026-27.
Being made redundant is stressful enough without a confusing payslip at the end of it. A genuine redundancy payout is usually made up of several parts, and — this is the bit that surprises people — each part is taxed under different rules. Some of it can be completely tax-free, some is taxed at a concessional rate, and some is taxed like normal income. Here is how it fits together for the 2026-27 year.
First: is it a "genuine" redundancy?
The generous tax treatment only applies to a genuine redundancy — where your position is genuinely no longer needed and you leave through no fault of your own. A few conditions matter: you generally need to be under age-pension age when it happens, the arrangement has to be at arm's length, and the role (not just you) must be the thing being abolished. If you resigned, retired, or were dismissed for performance, it is not a genuine redundancy and the tax-free part below does not apply.
The tax-free part
For a genuine redundancy in 2026-27, a slice of your payout is completely tax-free. The formula is a base amount of $13,598 plus $6,801 for each completed year of service.
So if you had completed eight full years, your tax-free limit would be $13,598 + (8 × $6,801) = $68,006. Any genuine-redundancy payment up to that figure is tax-free and does not even appear as taxable income.
The employment termination payment (ETP)
Anything above the tax-free limit becomes an employment termination payment. This is taxed at a concessional rate up to the ETP cap of $270,000 (2026-27): if you are at or above your preservation age — now 60 — the amount up to the cap is taxed at 15% plus the 2% Medicare levy; if you are under 60, it is 30% plus Medicare. Anything above the cap is taxed at the top marginal rate.
The concession is delivered as a tax offset, and importantly the tax-free part does not use up any of your ETP cap — the two are separate buckets.
Your unused leave is taxed separately
Unused annual leave and long service leave paid out on a genuine redundancy are taxed under their own rules — capped at a maximum rate of 30% plus Medicare — rather than being lumped in with your ETP. They appear as separate line items on your income statement.
Putting it together
A typical genuine-redundancy payout therefore splits into three parts: a tax-free amount (base + per-year), a concessionally taxed ETP for anything above that, and separately taxed unused leave. Because these interact with your total income for the year — and a redundancy year often has fewer months of salary — your final tax position can look quite different from what the headline lump sum suggests.
See your redundancy split
Our calculator breaks a genuine-redundancy payout into the tax-free portion, the ETP and your leave — with the 2026-27 figures built in.
Every situation is different, and the exact rates depend on your age, service and total income for the year. If your payout is large or your circumstances are complex, a short conversation with a registered tax agent or an employment-law adviser can be worth far more than it costs at a moment like this. You can also read our companion guide on what you are actually owed in a redundancy.