Redundancy Tax-Free Threshold: Formula, Caps, and ETP Tax

For the 2025–26 financial year, the redundancy tax-free threshold is $13,100 plus $6,552 for each completed year of service with the employer who made you redundant.¹ Anything within that limit is paid to you free of income tax. Anything above it becomes an Employment Termination Payment (ETP) and is taxed at concessional rates that depend on your age and your other income for the year. The threshold is indexed on 1 July each year, so the figures change annually.

The Formula for 2025–26

The calculation is a flat base plus a per-year increment:

Tax-free limit = $13,100 + ($6,552 × completed years of service)

An employee made redundant after 10 completed years has a tax-free limit of $78,620. After 20 completed years, the limit is $144,140. Even with no completed years, the $13,100 base still applies as a floor.¹

The figures that apply are those for the income year in which you actually receive the payment, not the year your role ended.

Your Payment Has to Be a Genuine Redundancy

The tax-free treatment only applies where the payment meets the definition of a genuine redundancy under section 83-175 of the Income Tax Assessment Act 1997. Four conditions must all be met:²

Your position no longer exists because of an operational decision by the employer, and redundancy is the prevailing reason for the dismissal.
The employer initiated the termination. Voluntary resignation, retirement, and dismissal for misconduct do not qualify.
You were below the Age Pension qualifying age when dismissed. If your contract would have ended earlier than pension age anyway, you must be dismissed before that date.
There is no arrangement for you to be re-employed by the employer or an associated entity.

Two further conditions apply in narrower cases. Where the employer and employee are not dealing at arm’s length, the payment cannot exceed what would reasonably be expected in an arm’s-length transaction. And the payment must not be made in lieu of superannuation benefits.²

Payments made at the natural end of a fixed-term contract usually fail the test because the end date was already set. An exception can apply to rolling contracts or project-based work where the employment relationship was genuinely ongoing despite the contract structure.

Counting Completed Years of Service

Only full years count. The ATO uses the phrase “each complete year of service,” and partial years are dropped entirely.¹ Eight years and eleven months of service counts as eight completed years. How close you were to the next anniversary makes no difference.

Your service period runs from your start date to the end of your notice period, or your last day if there is no notice period. Breaks in service or extended unpaid leave can reduce the count depending on your employment agreement, so check your contract if your history with the employer includes significant gaps.

Unused Leave Is Not Part of the Tax-Free Amount

Unused annual leave and long service leave paid on termination sit outside the redundancy tax-free calculation. They are taxed under their own rules, and for a genuine redundancy the withholding rates are generally more favourable than for a straight resignation.¹

When you are dismissed through a genuine redundancy, your employer withholds tax on unused leave at these rates:³

Unused annual leave: 32%
Annual leave loading: 32%
Long service leave accrued from 16 August 1978 onward: 32%
Long service leave accrued before 16 August 1978: only 5% of the total is taxed at marginal rates

The 32% rate is a flat withholding rate, not your marginal rate. When you lodge your return, the actual liability depends on your total taxable income for the year, and any overwithholding comes back as a refund.

How Amounts Above the Threshold Are Taxed

The excess over your tax-free limit is an ETP. It is taxed at concessional rates rather than at your full marginal rate, but two separate caps decide how much of the excess actually gets the concessional treatment.

Rates by Age

The ETP rate depends on whether you have reached preservation age when you receive the payment:⁴

At or above preservation age: the taxable component is taxed at a maximum of 17% (plus Medicare levy) up to the applicable cap.
Below preservation age: the taxable component is taxed at a maximum of 32% (plus Medicare levy) up to the applicable cap.

Preservation age is 60 for anyone born after 30 June 1964.

The Two Caps

Your ETP is tested against two caps, and the lower one determines how much of the payment receives concessional treatment.

The ETP cap for 2025–26 is $260,000. It is indexed each year and applies to the taxable component of all ETPs you receive across the income year, not just from one employer.¹

The whole-of-income cap is $180,000 minus your other taxable income for the year. It is fixed and not indexed.⁵ If you earned $100,000 in salary before being made redundant, your whole-of-income cap for the ETP is only $80,000.

Anything above whichever cap is lower is taxed at the top marginal rate of 45% plus the 2% Medicare levy.⁴ The whole-of-income cap trips people up more often than the ETP cap. A redundancy late in the financial year, after most of a year’s salary has already been earned, shrinks that cap sharply, and more of the payout falls to the top rate.

You Cannot Roll an ETP Into Super

Since 1 July 2007, Employment Termination Payments cannot be rolled into superannuation.¹ The taxable portion of your payout is taxed in the year you receive it. You can still make voluntary contributions from the after-tax proceeds, but those are subject to the standard annual contribution caps and get no special redundancy-related concession.

Effect on JobSeeker and Other Centrelink Payments

A redundancy payment does not permanently disqualify you from JobSeeker or other income support, but it usually delays when payments begin. During the Income Maintenance Period (IMP), Services Australia treats your termination payout as ordinary income spread across the weeks the payment represents, and your benefit is reduced or set to nil for that period.⁶

The IMP starts on the date the employer pays the termination amount, not when you lodge your claim. If a Liquid Assets Test Waiting Period is also triggered, the two run concurrently rather than back to back.⁶ Lodge your claim as soon as you can. Waiting only pushes your first payment further out.

1
Australian Taxation Office. Employment Termination Payments
2
Australian Taxation Office. TR 2009/2 – Income Tax: Genuine Redundancy Payments
3
Australian Taxation Office. Tax Table for Unused Leave Payments on Termination of Employment
4
Australian Taxation Office. How ETP Components Are Taxed
5
Australian Taxation Office. The Whole-of-Income Cap and Your Tax
6
Department of Social Services. 4.3.4.10 Application of the Income Maintenance Period