1 July 2021 (updated annually)
If you are about to receive a redundancy payment, there are several issues you need to consider:
Depending on your situation, you may be entitled to all or some of the following lump sum payments:
An employer must pay out the annual leave that you have accrued, but have not taken. The total amount of the unused annual leave, paid out as a lump sum, is added to your taxable income in the financial year that you receive the payment. However, the tax you will generally pay on this amount is limited to a maximum of 30 per cent plus the Medicare levy. The after-tax unused annual leave will be paid into your bank account – it cannot be directly rolled over into a superannuation fund.
If you are entitled to long service leave, but have not yet taken it, your employer must pay your entitlement as a lump sum. The after-tax amount for unused long service leave will be paid into your bank account – it cannot be rolled over into a superannuation fund. It is important to confirm your entitlement to long service leave, as it varies from state to state.
The amount of tax you will pay on genuine redundancy depends on when you started your employment:
| Period of accrual | Tax rate applied |
|---|---|
| To 15 August 1978 | 5% at marginal tax rate plus Medicare levy |
| From 16 August 1978 | 30% plus Medicare levy |
Note: the Medicare levy rate is 2 per cent.
You will only be entitled to a tax-free amount if a genuine or bona fide redundancy is paid and you are under age pension age. For the 2021/22 financial year, the tax-free amount is equal to $11,341 plus an additional $5,672 for every full year of service completed. Therefore, the tax-free portion for 10 years of completed service is $68,061 [$11,341 + ($5,672 x 10)]. This portion is paid directly to you. If the total of your redundancy payment is less than this amount, your entire payment is tax-free. While it does not need to be included in your tax return, it cannot be rolled into superannuation.
The remaining amount of your redundancy payment, if any, is called an employment termination payment (ETP). The ETP cannot be rolled over to your superannuation fund. The tax treatment of your ETP depends on whether it is a genuine redundancy and its tax components, which will be listed on your redundancy payment statement. The following table outlines the taxation treatment of an ETP paid due to a genuine redundancy.
| If you are under preservation age | Tax |
|---|---|
| Tax-free component | Tax-free |
| Taxable component up to $225,000 | 30% + Medicare levy |
| Taxable component over $225,000 | 45% + Medicare levy |
| If you have reached preservation age | Tax |
|---|---|
| Tax-free component | Tax-free |
| Taxable component up to $225,000 | 15% + Medicare levy |
| Taxable component over $225,000 | 45% + Medicare levy |
There are some other issues that you will also need to consider:
