Redundancy Payments and Tax in Australia: A 2026-27 Guide

Redundancy can turn several years of employment into one confusing payslip. Salary, unused leave, notice, an employment termination payment and a genuine redundancy amount may arrive together, but Australian tax law does not treat them as one lump sum. The labels matter because two employees receiving the same $100,000 can finish with very different after-tax amounts.

This guide explains the 2026-27 rules, using the Australian Taxation Office limits applying from 1 July 2026. It is general information, not a substitute for advice based on an employment contract, award, age, service history and other taxable income.

What counts as a genuine redundancy in Australia?

A genuine redundancy occurs when an employer decides that a job is no longer required and dismisses the employee. The role disappears; the arrangement is not merely a resignation, retirement or replacement of one person with another.

The ATO looks at substance. The dismissal must happen before any compulsory retirement age, there cannot be an arrangement to re-employ the person, and the payment must be more than the employee would have received on an ordinary resignation. Arm’s-length rules also limit favourable treatment between related parties.

Situations that may not qualify

A voluntary resignation normally fails, even if the employer was reducing staff. A fixed-term contract ending on its agreed date generally fails because employment ended by contract. A dismissal for performance does not make the position redundant. Moving the same duties immediately to a new employee can also undermine the claim.

Voluntary redundancy can qualify where the employer genuinely abolishes roles and invites employees to apply. The evidence should show that the employer, not the employee, ultimately terminated employment because the position was excess to requirements.

The 2026-27 tax-free redundancy formula

For the income year ending 30 June 2027, the tax-free limit is:

$13,100 + ($6,552 × completed years of service)

Part-years do not count. An employee with 9 years and 11 months has nine completed years for this formula.

The formula is a ceiling, not an automatic deduction. If the genuine redundancy payment is $50,000 and the calculated limit is $78,620, only $50,000 is tax-free. The unused $28,620 cannot shelter salary, leave or another payment.

Worked example: 11 completed years

Priya is 46 and her position is abolished on 30 September 2026 after 11 completed years. Her employer pays a $105,000 genuine redundancy amount.

Her limit is $13,100 + (11 × $6,552) = $85,172. That amount is excluded from assessable income. The remaining $19,828 is generally an employment termination payment and must be tested against ETP caps. Her unused annual leave and ordinary wages remain separate.

Understanding employment termination payments

An ETP is a payment received because employment ended, commonly including the taxable excess over the genuine redundancy limit, severance, gratuities and some payments in lieu of notice. It generally must be paid within 12 months of termination unless an exception applies.

The 2026-27 ETP cap is $260,000. Yet that headline number can mislead because a separate whole-of-income cap of $180,000 can apply to non-excluded ETPs. Other taxable income earned in the same year reduces the space under that cap.

Excluded payments, including the taxable part of a genuine redundancy payment, are generally tested against the ETP cap rather than the whole-of-income cap. Other termination amounts may be subject to the lower whole-of-income cap. The employer should identify the ETP code on the income statement.

Why timing can change the result

Suppose Daniel earns $160,000 salary before receiving a $70,000 non-excluded ETP. His remaining whole-of-income cap may be only $20,000. If termination can legitimately occur after 30 June, income falls into a different year and the result may change. Employees cannot simply choose when a payment is derived, but they can ask the employer for a written timetable and get advice before signing a deed.

Salary, notice and leave are separate components

Final salary and allowances are taxed as ordinary income at marginal rates. A true payment in lieu of notice may form part of an ETP, while ordinary earnings paid through a notice period remain salary. The contract and Fair Work entitlement determine its character.

Unused annual leave and long service leave are not ETPs. Concessional withholding may apply to leave connected with genuine redundancy, invalidity or an approved early retirement scheme. Special rules also apply to leave accrued before 18 August 1993. The final tax result is reconciled in the employee’s return.

A complete $150,000 example

Marcus, aged 42, is made genuinely redundant on 15 December 2026 after eight completed years. His package contains $18,000 salary and notice, $22,000 unused leave, and $110,000 severance.

The tax-free limit is $13,100 + (8 × $6,552) = $65,516. The remaining $44,484 severance is an ETP. The $18,000 and $22,000 do not consume the redundancy formula. Marcus should not budget from the $150,000 gross figure: withholding, his salary earlier in the year and any HELP repayment can materially reduce cash available.

If he has a HELP debt, the tax-free component does not enter repayment income, but taxable salary, leave and ETP components may affect his assessment. Medicare levy surcharge and private health insurance consequences may also arise from annual income.

Superannuation decisions after redundancy

The employer generally does not pay super guarantee on a tax-free redundancy payment or ETP. Check the final fund contribution against ordinary time earnings rather than applying the SG percentage to the entire package.

From 1 July 2025 the SG rate is 12%. The concessional contributions cap remains $30,000 for 2026-27, subject to any indexed change announced by the ATO. A redundant employee considering a personal deductible contribution should first total employer contributions already made, salary sacrifice and any planned contribution. Eligible people with a total super balance below $500,000 at the previous 30 June may use unused concessional cap amounts from the previous five years.

Contribution example

After reserving an emergency fund, Aisha wants to contribute $20,000. Her employer has already contributed $14,400 in 2026-27. Without carry-forward room, a $20,000 deductible contribution would bring concessional contributions to $34,400, exceeding the standard $30,000 cap by $4,400. Confirm fund receipt before 30 June and lodge a valid notice of intent before claiming a deduction.

Contributing to super locks money away until a condition of release is met. Someone between jobs may value accessible cash more than the immediate tax deduction.

Centrelink, debts and the emergency runway

Services Australia can apply an income maintenance period based on termination payments such as unused leave and redundancy amounts. The liquid cash may also count under means tests. The rules are individual, so report the package promptly and retain the separation statement.

A practical first budget divides cash into tax, essential spending and long-term capital. If core expenses are $6,000 a month, nine months costs $54,000. Adding $8,000 for health, repairs and job-search costs produces a $62,000 runway. That reserve may belong in an Australian authorised deposit-taking institution covered by the Financial Claims Scheme, which protects eligible deposits up to $250,000 per account holder per ADI.

Mortgage choices

Placing cash in an offset account can reduce home-loan interest while preserving access. On $80,000 against a 6.4% mortgage, the simple annual interest saving is about $5,120. Paying the loan down and later redrawing for living costs can create tax tracing complications if the home becomes an investment, whereas an offset does not change the loan principal.

Do not rush to clear low-rate debt or invest the package before the employment outlook is clear. Contact the lender’s hardship team early if repayments will become difficult; asking about assistance does not itself mean default.

Documents to obtain before signing

Ask for an itemised calculation showing service dates, completed years, salary, notice, each leave balance, genuine redundancy component, ETP amount and super. Compare it with the award, enterprise agreement, contract and National Employment Standards.

Check whether a deed waives claims, imposes confidentiality or contains a restraint. Independent employment-law advice may be sensible. Tax advice and legal advice answer different questions: an accountant calculates tax treatment, while an employment lawyer considers entitlement and enforceability.

Your first 30 days

1. Preserve the gross package until withholding and tax estimates are checked.
2. Download payslips, leave records and super statements before system access ends.
3. Confirm the income statement is tax ready in myGov.
4. Register with Services Australia and report all components accurately.
5. Review insurance held inside super before rolling funds over.
6. Cancel optional costs but keep appropriate health, home and income protection cover.
7. Model three unemployment periods: three, six and twelve months.

Common mistakes to avoid

The first is treating every dollar as tax-free because the letter says “redundancy”. The second is counting partial service years. The third is overlooking the whole-of-income cap. The fourth is making a large super contribution without checking the cap and cash needs. The fifth is lodging a return before the employer finalises reporting.

Also avoid relying solely on withholding. Withholding is a prepayment, not the final assessment. Other income, deductions, HELP, Medicare and private health settings determine the eventual result.

Planning the tax return and the following year

Redundancy often shifts income between financial years. Build a projection covering 2026-27 and 2027-28 rather than trying to minimise only the first assessment. Include salary received before termination, bank interest on the package, investment distributions, taxable leave, the assessable ETP component and any new-job income. Then include deductions only where they meet the normal ATO rules.

Job-search expenses are commonly misunderstood. The cost of looking for work is generally private and not deductible merely because a person wants another job. Training that maintains or improves skills used in current income-earning activities may qualify in some circumstances, but study designed to open a new occupation generally does not. Keep invoices and obtain advice rather than claiming every transition cost.

If income falls sharply in 2027-28, that later year may be a more useful time to realise investment gains, make taxable withdrawals or restructure investments. Capital gains cannot simply be moved between years after a contract is signed: the CGT event usually occurs at contract date, not settlement. Likewise, interest is assessable when derived under the applicable rule even if it is mentally reserved for living costs.

Insurance and super cover during a career break

Employer-linked life, total and permanent disability or income protection cover can end when employment ends. Insurance inside super may continue while the account is funded, but inactive low-balance accounts can have cover cancelled under statutory rules. Read the insurer’s definitions, waiting periods and occupation classification before consolidating or closing any account.

Income protection generally replaces a portion of income when illness or injury prevents work; it does not insure ordinary unemployment or redundancy. Premium deductions also depend on the policy benefits. Capital-style cover is treated differently from income-replacement cover. Ask the insurer to confirm ongoing cover in writing, particularly if changing occupation or becoming self-employed.

Negotiating a new role without wasting the runway

A large cash balance can make a household feel secure while fixed costs remain too high. Calculate the “burn rate” each month after any partner income and government support. If expenses are $8,500 and other reliable income is $3,000, the net burn is $5,500. A $66,000 accessible reserve then provides 12 months, not the nearly eight months suggested by looking only at gross expenses without income.

When a new job begins, avoid committing the remaining package immediately. Confirm probation, actual take-home pay, commuting and childcare costs, then revisit debt, super and investment choices after two or three pay cycles. This staged approach preserves flexibility without abandoning long-term planning.

Questions to ask the payroll team

Request written answers to five points: why the role is redundant, the official termination date, which amount the employer treats as tax-free, the ETP code and whether any super remains to be paid. Also ask when the income statement will be finalised and who will correct it if the ATO pre-fill differs from the separation statement.

Where service includes parental leave, unpaid leave, a transfer between related employers or an overseas posting, do not assume payroll counted completed years correctly. The relevant service period can require legal and tax analysis. A $6,552 difference for one year is material enough to check before the deed becomes final.

Getting the package checked

A redundancy is both a tax event and a household cash-flow event. A short review can verify the ATO formula, ETP code, leave treatment, super cap and realistic runway before irreversible decisions are made.

Need help checking a package or planning the next financial year? Compare Australian accountants and financial advisers on WealthWorks.