Being made redundant is stressful enough without discovering later that you've been taxed incorrectly on your payout — or that you didn't claim all the tax-free amounts you were entitled to.

Redundancy payments have specific tax treatment in Australia, and trade workers — particularly those employed in construction, manufacturing, and infrastructure — receive redundancies more regularly than many other sectors. Understanding how the tax works means you keep more of your payout and avoid nasty surprises at tax time.

What Is a Genuine Redundancy?

The ATO distinguishes between a "genuine redundancy" and other types of employment termination. The distinction matters enormously for tax purposes.

A genuine redundancy occurs when:

  • Your job no longer exists (the role has been eliminated)
  • The employer is not looking for someone else to fill the position
  • The payment was made genuinely as a result of the redundancy

Not a genuine redundancy:

  • You resign voluntarily
  • You're dismissed for performance reasons
  • Your contract expires (some exceptions apply)
  • The business closes but your role is being replaced

If the ATO determines your redundancy wasn't genuine, the favourable tax treatment disappears. The difference can be tens of thousands of dollars in additional tax.

How Redundancy Payments Are Taxed

A genuine redundancy payment is split into components, each taxed differently:

Tax-Free Amount

For the 2025–26 financial year, the tax-free limit for a genuine redundancy is:

$11,985 + ($5,994 × years of completed service)

Note: These amounts are indexed annually. Always check the ATO website for the current year's limits.

Example: A carpenter who has worked for the same employer for 8 years receives a $90,000 redundancy payout.

Tax-free amount = $11,985 + ($5,994 × 8) = $11,985 + $47,952 = $59,937 tax-free

The remaining $30,063 is taxable — but not at ordinary income rates.

Eligible Termination Payment (ETP) Component

The amount above the tax-free threshold (but within certain ATO caps) is classified as an Employment Termination Payment (ETP). This is taxed at a lower rate than ordinary income:

  • If under the ETP cap ($245,000 for 2025–26): taxed at maximum 32% (including Medicare Levy) if you're under age 60
  • Over the ETP cap: taxed at your marginal rate

Important: These rates may be lower than your ordinary marginal rate, meaning redundancy payments are often taxed more favourably than regular wages.

Unused Annual Leave and Long Service Leave

Accrued but unused annual leave and long service leave paid out on redundancy are taxed differently from the redundancy payment itself:

  • Unused annual leave: Taxed at a flat rate of 32% (including Medicare Levy)
  • Unused long service leave accrued before 16 August 1978: Special calculation applies (taxed at reduced rate)
  • Unused long service leave accrued after 16 August 1978: 32% flat rate, same as annual leave

These leave payments do not count toward the tax-free threshold — they have their own tax treatment.

The Full Redundancy Tax Breakdown

Let's work through a complete example for a 45-year-old electrician with 12 years' service, receiving a total redundancy package of $140,000.

Package components:

  • Redundancy payment: $100,000
  • Unused annual leave: $12,000
  • Unused long service leave: $28,000
  • Total: $140,000

Step 1: Calculate the tax-free amount on the redundancy payment: $11,985 + ($5,994 × 12) = $11,985 + $71,928 = $83,913 tax-free

Step 2: Remaining redundancy above the tax-free amount: $100,000 – $83,913 = $16,087 taxable at ETP rate (32%)

Step 3: Annual leave tax: $12,000 × 32% = $3,840 tax on leave payout

Step 4: Long service leave tax: $28,000 × 32% = $8,960 tax on LSL payout

Total tax on the $140,000 package: $16,087 × 32% = $5,148 + $3,840 + $8,960 = Total tax ≈ $17,948

Effective tax rate on the full $140,000 package: approximately 12.8%. Compare this to the top marginal rate of 47% — significant concessions apply.

Age Matters: Over 60 and Genuine Redundancy

If you're aged 60 or over when you receive a genuine redundancy, additional tax advantages apply:

  • The ETP component (above the tax-free threshold) is tax-free — no tax at all
  • Only amounts above the ETP cap are taxed at marginal rates

For tradies in their early 60s, this dramatically changes the tax calculation and can make a significant difference to the net payout received.

What About Super from a Redundancy?

Some employers include a lump sum super contribution as part of a redundancy package. This is treated separately from the redundancy payment:

  • If paid into your super fund, it's treated as a concessional contribution subject to the contribution cap ($30,000 for 2025–26)
  • Super received as a cash lump sum (outside the fund) has its own tax treatment under the super payment rules
  • If you're over 60 and the super is from a taxed source, it may be tax-free

If your redundancy package includes super, get advice from your accountant before accepting the structure. The tax treatment can vary significantly based on how it's structured.

Reporting Redundancy Payments in Your Tax Return

Your employer should provide a payment summary or updated income statement through myGov showing the breakdown of your redundancy payment, including:

  • The tax-free genuine redundancy amount
  • The ETP amount
  • ETP tax withheld
  • Leave payouts and tax withheld

When you lodge your tax return, these amounts need to be entered correctly. The myTax system includes specific sections for ETPs and redundancy payments — don't lump them with regular wages.

If your employer has withheld too much tax: The ATO reconciles the withholding against your actual tax liability. If overpayment occurred, you'll receive a refund after lodgement.

If your employer has withheld too little: You'll have additional tax to pay. This is more common than people realise — employers sometimes miscalculate the tax-free threshold or leave payment treatment.

If you're registering for JobSeeker (unemployment) after redundancy, Centrelink applies an "income maintenance period" based on your redundancy payout. You may not be eligible for JobSeeker until this period has elapsed.

The income maintenance period is calculated by dividing your redundancy payment by the fortnightly income test threshold. A $60,000 redundancy might result in several months before Centrelink payments begin.

Plan for this gap if you're considering JobSeeker after redundancy. Your payout needs to cover living expenses during the income maintenance period.

What If Your Employer Goes Under?

If your employer becomes insolvent (enters liquidation, administration, or receivership) and can't pay your redundancy entitlements, you may be eligible for the Fair Entitlements Guarantee (FEG).

FEG is a government scheme that provides:

  • Unpaid wages (up to 13 weeks)
  • Annual leave entitlements
  • Long service leave (where applicable)
  • Payment in lieu of notice
  • Redundancy pay (capped at 4 weeks per year of service, up to 16 weeks)

Applications are made through the Department of Employment. The process can take months, and FEG doesn't pay everything you're owed — it's a safety net, not full recovery.

FEG payments are also taxable under the same redundancy rules, even though they come from the government rather than your employer.

Can You Reduce the Tax on a Redundancy?

Within legal bounds, there are strategies to minimise tax on redundancy payments:

Contribute to Superannuation

You can contribute part or all of a post-tax redundancy payment into superannuation as a non-concessional contribution (subject to the cap of $110,000 for 2025–26, or $330,000 under the bring-forward rule if eligible).

Once inside super, the money grows tax-effectively. If you're planning retirement, this can be a tax-efficient way to apply redundancy funds.

Timing Across Financial Years

If your redundancy is received near the end of the financial year (June), there may be planning opportunities around which year it falls into — especially if your income in the following year will be lower. Talk to your accountant about structuring timing.

Charitable Deductions

Making a charitable donation in the year of your redundancy payment can offset some of the taxable amount. Donations to registered Deductible Gift Recipients (DGRs) are deductible at your marginal rate.

Common Mistakes Tradies Make with Redundancy Payments

Mistake 1: Treating the whole payout as taxable income
Many tradies add the redundancy payment to their regular wages and pay tax on the whole amount. The tax-free portion and ETP rates mean this approach significantly over-taxes you.

Mistake 2: Not lodging a tax return
Some tradies who receive redundancy don't bother lodging a return because "the employer already took tax out." But given the special rates and tax-free thresholds, many will receive a refund.

Mistake 3: Conflating redundancy with resignation
If you "agree to leave" informally, negotiate an exit, or are offered a mutual agreement, it may not qualify as a genuine redundancy. Always get written confirmation that the redundancy is due to the role being eliminated — not performance, not personal.

Mistake 4: Ignoring unused leave entitlements
Unused annual leave and long service leave are separate from redundancy pay and have their own favourable tax treatment. Don't just accept whatever figure your employer provides — calculate what you're owed.

Mistake 5: Not seeking advice
A $100,000+ payout with multiple components and special tax rules is exactly the scenario where a $250–$400 accountant consultation pays for itself many times over.

Summary: Redundancy Payment Tax Treatment

  • Genuine redundancy (tax-free amount) — Tax-free — 0%
  • ETP (above tax-free, below ETP cap) — Concessional rate — Max 32% (incl. Medicare)
  • ETP (above ETP cap) — Marginal rate — Up to 47%
  • Unused annual leave — Flat rate — 32% (incl. Medicare)
  • Unused long service leave (post 1978) — Flat rate — 32% (incl. Medicare)
  • Super lump sum (taxed source, over 60) — Tax-free — 0%
  • Over age 60 ETP (genuine redundancy) — Tax-free — 0%

Frequently Asked Questions

Q: My employer is giving me a "voluntary redundancy" — is that a genuine redundancy?
It can be, if the position is being eliminated and not replaced. The voluntary nature of acceptance doesn't change the redundancy status. What matters is that the role itself no longer exists.

Q: I'm a sole trader — can I be made redundant?
No. Self-employed sole traders are not employees and don't receive statutory redundancy. If your primary client ends a contract, this is a loss of income, not a redundancy.

Q: Does redundancy affect my super?
The redundancy payment itself doesn't go to super unless you contribute it. If your employer is also paying out super entitlements, those follow super rules. Redundancy doesn't trigger any early super access rights.

Q: Can I negotiate a higher redundancy payment?
Yes. Your employer may offer the statutory minimum, but you can negotiate a higher amount. Any amount above the tax-free threshold will be taxed as an ETP, but more is generally better. Get any negotiated amount in writing and have your accountant review the tax implications before signing.