The tax implications of being made redundant
Written and accurate as at: May 08, 2024 Current Stats & Facts
Learning that you’ve been made redundant can leave you in shock, but being handed a redundancy payment on your way out can help lessen the sting. These payments can sometimes be quite generous, so questions around tax are bound to come up. We explore a few key considerations below.
First of all, what counts as a genuine redundancy?
A genuine redundancy occurs when your employer decides your job no longer needs to be done by anyone and terminates your employment, or if the company you work for shuts down.
Payments made to employees in these circumstances are subject to different tax rules.
A non-genuine redundancy, on the other hand, can describe situations where someone leaves their job voluntarily, is dismissed for disciplinary or competency reasons, or ceases work after reaching their retirement age.
Is everyone entitled to a redundancy payment?
Unfortunately, not all employees who are made redundant are entitled to a redundancy payment. Casual employees, employees who were only hired for a set period of time, those over pension age, and employees whose period of continuous service was less than 12 months are just some examples of workers who might not receive one.
Most employees of small businesses are also generally excluded. According to the Fair Work ombudsman, when determining redundancy pay, a small business is one that has fewer than 15 employees at the time notice is given.1
How are genuine redundancy payments taxed?
According to the Australian Tax Office (ATO), genuine redundancy payments are tax-free up to a certain limit. This limit is made up of two components: a base amount and a separate amount for each full year of service you completed with your employer.
Both are indexed yearly in line with the average weekly ordinary time earnings (AWOTE). For 2024-25, the base amount is $12,524 and the service amount is $6,264.2
The portion of your payment that exceeds this limit will be considered an employment termination payment (ETP) and taxed at a concessional rate. And any additional amounts beyond the ETP cap will be taxed at your marginal tax rate.
How are Employment Termination Payments taxed?
Employment Termination Payments (ETPs) are severance payments which do not qualify as a genuine redundancy payment, though you might receive one if your redundancy payment exceeds the tax-free threshold. ETPs are typically taxed at a lower rate than would apply on your regular income.
While most ETPs do not have a tax-free component, different rules apply if (1) you began working for your employer before 1 July 1983, or (2) you are leaving work because you’ve sustained a permanent disability.3
What about early retirement scheme payments?
It’s also worth mentioning early retirement scheme payments, which are sometimes handed out to employees to encourage them to retire early. These are typically taxed at a concessional rate, assuming the scheme is open to all employees (or employees of a certain class, such as those above a particular age) and approval has been granted by the Commissioner of Taxation.4
The importance of speaking to a tax professional
We’ve mentioned that not all components of the payment you receive following redundancy will be treated as a genuine redundancy payment. But there are elements that don’t qualify as an ETP either. These include:
- Lump sum payments of unused annual or long service leave
- Leave loading paid when employment ends
- Payments made in lieu of superannuation benefits
- Money owed to you for work done or leave already taken for work completed5
This means it might not be immediately apparent which parts of your payment are tax-free and which parts are concessionally taxed or taxed at your normal rate. If you find yourself in this position, consider speaking to a tax professional to make sure you don’t run afoul of current rules.
Sources
1 Fair Work ombudsman
2 Australian Taxation Office
3 Australian Taxation Office
4 Australian Taxation Office
5 Australian Taxation Office
