Genuine Redundancy Tax-Free Amount 2026: How to Keep More of Your Payout
The genuine redundancy tax-free amount for 2025-26 is $12,524 base plus $6,260 per completed year of service. Learn how to calculate your tax-free component, ETP treatment, and maximise your after-tax payout.
What Is the Genuine Redundancy Tax-Free Amount?
When you receive a genuine redundancy payment, a portion of that payment is completely tax-free. For the 2025-26 financial year, the tax-free amount is calculated as a base amount of $12,524 plus $6,260 for each completed year of continuous service with the employer. This means the longer you have worked for the employer, the more of your redundancy payout is sheltered from tax. These figures are indexed annually by the ATO and apply to redundancy payments received between 1 July 2025 and 30 June 2026. The tax-free component only applies to payments that qualify as a genuine redundancy under Australian tax law. This is a specific definition — not every termination payment qualifies. The tax-free treatment is one of the most valuable tax concessions available to employees and can save thousands or even tens of thousands of dollars in tax. For example, an employee with 10 completed years of service would have a tax-free amount of $12,524 + (10 x $6,260) = $75,124. Any redundancy payment up to that amount is received completely tax-free. Note that these are approximate figures published by the ATO for 2025-26 and should be confirmed with a tax professional for your specific circumstances.
What Qualifies as a Genuine Redundancy
For the tax-free treatment to apply, the redundancy must meet the ATO's definition of a genuine redundancy. Under section 83-175 of the Income Tax Assessment Act 1997, a redundancy is genuine if the employee's position is genuinely made redundant — meaning the employer no longer requires the job to be done by anyone, or the employer becomes insolvent or bankrupt. The dismissal must not be a disguise for terminating the employee for other reasons such as poor performance, misconduct, or a personality clash. If the employer fills the position shortly after the redundancy, the ATO may determine that the redundancy was not genuine and the tax-free treatment will not apply. Additionally, the redundancy must comply with any applicable consultation obligations in a modern award or enterprise agreement. The employee must also be under 65 years of age at the time of the redundancy — employees aged 65 and over do not qualify for the tax-free treatment. If you are dismissed and the employer calls it a redundancy but your role continues to exist with someone else performing your duties, the ATO can reclassify the payment and you may face an unexpected tax bill. Employers are required to correctly classify the payment when processing it through payroll.
Calculating the Tax-Free Amount: Worked Examples
The formula is straightforward: Tax-free amount = $12,524 + ($6,260 x completed years of service). Only completed full years count — partial years are not included. Here are three examples using approximate 2025-26 figures. Example 1: Sarah has 5 completed years of service. Her tax-free amount is $12,524 + (5 x $6,260) = $43,824. If her redundancy payment is $40,000, the entire amount is tax-free. Example 2: Michael has 10 completed years of service. His tax-free amount is $12,524 + (10 x $6,260) = $75,124. His redundancy payment is $100,000. The first $75,124 is tax-free, and the remaining $24,876 is treated as an employment termination payment (ETP) subject to concessional tax rates. Example 3: Priya has 20 completed years of service. Her tax-free amount is $12,524 + (20 x $6,260) = $137,724. Her redundancy payment is $150,000. The first $137,724 is tax-free, and only $12,276 is taxed as an ETP. As these examples show, longer service creates a significantly larger tax-free shelter. The savings are substantial — at the top marginal tax rate, the tax-free component on 20 years of service shelters approximately $63,000 in tax.
How the Excess Is Taxed: ETP Rules Explained
Any genuine redundancy payment above the tax-free amount is treated as an employment termination payment (ETP) and taxed under concessional ETP rules. For 2025-26, the ETP cap is approximately $235,000. The tax rate on the ETP component depends on your age. If you are under preservation age (which is between 55 and 60 depending on your date of birth — 60 for anyone born after 30 June 1964), the ETP is taxed at a maximum rate of 32% (including the 2% Medicare levy) up to the ETP cap. If you are at or above preservation age, the first portion of the ETP up to the whole-of-income cap ($180,000 for 2025-26) is taxed at a maximum of 17% (including Medicare levy). The whole-of-income cap means the total of the ETP plus other taxable income for the year cannot exceed $180,000 for the lower rate to apply. Any ETP amount above the ETP cap is taxed at the top marginal rate of 47% (including Medicare levy). Importantly, the ETP caps and rates apply to the total of all ETPs received from all employers in the financial year, not per employer. These concessional rates are still significantly lower than ordinary marginal tax rates for most people, making the ETP treatment a meaningful concession.
Maximising Your After-Tax Redundancy Payout
There are several legitimate strategies to maximise the after-tax value of your redundancy payment. First, confirm the timing: if your redundancy falls near the end of a financial year, consider whether delaying the termination date by a few days into the next financial year could give you an additional completed year of service, increasing your tax-free amount by $6,260. Second, salary sacrifice into superannuation before your termination date if your employer allows it, as this reduces your taxable income and can affect the whole-of-income cap calculation for ETP taxation. Third, if your employer offers a choice between a larger redundancy payment or extended notice, understand the tax implications — the notice period component is taxed as ordinary income at your marginal rate, not as a concessional ETP. Fourth, any unused annual leave and long service leave paid on termination are taxed separately from the redundancy payment under their own rules. Annual leave is generally taxed at your marginal rate (or a maximum of 32% for leave accrued before 18 August 1993). Long service leave is taxed at a maximum of 32% for the pre-16 August 1978 component. Understanding these separate streams allows you to estimate your total after-tax position accurately. Always seek advice from a registered tax agent before your termination is finalised.
What If Your Redundancy Is Not Genuine?
If the ATO determines that your redundancy was not genuine — for example, because your role was immediately filled by someone else or because the real reason for termination was performance-related — the entire payment loses its tax-free status. Instead, the payment is treated as an ordinary ETP from the first dollar, meaning no tax-free component applies. The concessional ETP tax rates still apply up to the ETP cap, but you lose the significant benefit of the tax-free base plus per-year amounts. This can result in a tax bill thousands of dollars higher than expected. Your employer makes the initial determination about whether the redundancy is genuine and reports this to the ATO through Single Touch Payroll. However, the ATO can audit and reclassify the payment if it disagrees. Warning signs that may trigger ATO scrutiny include the position being advertised shortly after the redundancy, the employer hiring someone else into a substantially similar role, or the employee being re-engaged as a contractor to perform the same work. If you are concerned about the classification, request written confirmation from your employer that the redundancy is genuine and the basis for that determination. Keep copies of any restructure documentation, redundancy letters, and organisational charts that support the genuine nature of the redundancy.
Redundancy Payments vs Other Termination Payments
It is important to distinguish between the different components of your final payout, as each is taxed differently. The genuine redundancy payment (the amount above the NES minimum that the employer chooses to pay, plus the NES redundancy amount itself) receives the tax-free treatment described in this article. Outstanding wages and salary owed to you are taxed as ordinary income at your marginal rate. Accrued annual leave paid on termination is taxed at your marginal rate (with some exceptions for pre-1993 leave). Long service leave has its own concessional rates depending on when it was accrued. Payment in lieu of notice is generally taxed as ordinary income, though there are some circumstances where it can be treated as an ETP. An ex-gratia or golden handshake payment may be treated as an ETP but will not receive the genuine redundancy tax-free treatment unless it is part of the genuine redundancy payment. Employers should itemise each component separately on your payment summary, and you should verify that they have classified each component correctly. Incorrect classification can result in you paying too much or too little tax, both of which create problems. If you receive a lump sum and the breakdown is unclear, ask your employer for a written breakdown before your next tax return is due.
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General information and estimates only — not legal, financial, or tax advice. Always verify with the Fair Work Ombudsman (13 13 94) or a qualified professional.
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