The short answer
If your role has just been made redundant, here’s how your payout is taxed in 2026–27:
- Part of it can be completely tax-free. A genuine redundancy payment is tax-free up to $13,598 plus $6,801 for every complete year of service. Most ordinary redundancy packages land under that and are fully tax-free.
- Anything above the limit is an employment termination payment (ETP): 32% if you’re under preservation age (60 for most), 17% if you’re 60 or over — up to the $270,000 ETP cap, then 47% above it. Rates include the 2% Medicare levy.
- Resignation packages and golden handshakes are taxed differently. They get the smaller of the $270,000 ETP cap and the $180,000 whole-of-income cap — and a new job in the same year can shrink that second cap, leaving a tax bill at return time.
Your final pay bundles several things together — severance, notice, unused leave, maybe a gratuity — each with its own tax treatment. This guide covers every piece, with the traps to avoid.
How ETP tax works: three buckets
The ATO sorts your final payment into buckets, and the bucket decides the tax.
Bucket 1 — the tax-free genuine redundancy component. If your dismissal was a genuine redundancy (your job was abolished, you were under Age Pension age — 67 — and you didn’t resign or get sacked for misconduct), part of the payment sits outside the tax system entirely. It’s reported as Lump sum D, nothing is withheld, and you don’t include it in your assessable income.
Bucket 2 — the taxable ETP. Genuine redundancy amounts above the tax-free limit, plus gratuities, golden handshakes, unused sick leave or rostered days off, and invalidity payments, are employment termination payments — taxed at flat concessional rates instead of your marginal rate. They carry an ETP code on your income statement: code R (genuine redundancy excess, invalidity, unfair dismissal compensation) or code O (everything else). The code decides the cap: code R gets the $270,000 ETP cap only; code O gets the smaller of the ETP cap and the $180,000 whole-of-income cap.
Bucket 3 — taxed separately. Unused annual leave (Lump sum A) and long service leave (Lump sum B) are never ETPs — both are assessable at their own concessional rates (see step 5 below). Ordinary wages owed are just wages.
The confusing part: the flat rates your employer withholds are usually the final word on the ETP itself — but the whole-of-income cap is recalculated by the ATO when you lodge, using every dollar of taxable income you earned that year. Earn more after leaving (a new job is the classic case) and the cap shrinks, leaving extra tax owing.
The official 2026–27 figures
All figures below are the ATO’s published 2026–27 numbers — redundancy limits and ETP caps from the ATO’s key rates tables, withholding rates from PAYG Schedule 11.
Genuine redundancy tax-free limit: $13,598 base + $6,801 for each complete year of service. Part years don’t count — 7 years and 11 months means 7. Indexed to wage growth each 1 July (last year: $13,100 + $6,552).
| Cap | 2026–27 amount | Applies to |
|---|---|---|
| ETP cap | $270,000 (indexed) | Code R payments: genuine redundancy excess, invalidity, unfair dismissal compensation, death benefit ETPs |
| Whole-of-income cap | $180,000 (not indexed) | Code O payments: the smaller of this and the ETP cap applies. Shrinks by every dollar of other taxable income you earn in the year |
There is no $1.6 million small-business ETP cap — that figure belongs to the CGT small-business concessions. For termination payments the ATO recognises exactly the two caps above.
| Payment (ETP code) | Your age at 30 June | Rate up to the cap | Rate above the cap |
|---|---|---|---|
| Genuine redundancy excess, invalidity, unfair dismissal (R) | Under preservation age | 32% | 47% |
| Genuine redundancy excess, invalidity, unfair dismissal (R) | Preservation age or over | 17% | 47% |
| Handshake, non-genuine redundancy, unused sick leave / RDOs (O) | Under preservation age | 32% | 47% |
| Handshake, non-genuine redundancy, unused sick leave / RDOs (O) | Preservation age or over | 17% | 47% |
Preservation age is 60 for anyone born after 30 June 1964 — nearly everyone in the workforce. The 32% and 17% are 30% and 15% tax plus the 2% Medicare levy; the 47% is the 45% top marginal rate plus the levy.
For the separately-taxed bits (wages, leave), normal 2026–27 resident rates apply: 0% to $18,200, 15% from $18,201 to $45,000, 30% to $135,000, 37% to $190,000, 45% above — plus 2% Medicare levy. The first bracket dropped from 16% to 15% on 1 July 2026. Model the whole picture with our income tax calculator.
Step-by-step: working out your payout’s tax
Get the itemised breakdown from your employer — not the headline figure. Then:
Step 1 — Split it into components. Separate the severance/redundancy amount from payment in lieu of notice, any gratuity, unused sick leave or RDOs, unused annual leave, and unused long service leave. The first group are candidates for the genuine-redundancy treatment; leave has its own rules.
Step 2 — Work out your tax-free limit. $13,598 + ($6,801 × complete years of service). Only genuine-redundancy components count — and the termination must genuinely be a redundancy.
Step 3 — The excess becomes an ETP. Genuine-redundancy amounts above the limit are code R. Gratuities, non-genuine redundancy amounts and unused sick leave/RDOs are code O.
Step 4 — Apply the cap and rate. Code R: the $270,000 ETP cap. Code O: the smaller of $270,000 and ($180,000 minus your other taxable income for the year). Then 32% under preservation age, 17% at 60 or over, 47% above the cap.
Step 5 — Tax the leave separately. Unused annual leave on a genuine redundancy: marginal rate capped at 32% (30% + Medicare). Long service leave depends on when it accrued: before 16 August 1978, only 5% is assessable; 16 August 1978 to 17 August 1993, fully assessable at marginal rates capped at 30%; after 17 August 1993, fully assessable at marginal rates (capped at 30% + Medicare for a genuine redundancy).
Worked examples (real 2026–27 figures)
Example 1: $80,000 genuine redundancy, 12 years’ service, age 45 — fully tax-free
Sarah is made genuinely redundant after 12 complete years. Her employer pays $80,000 (severance plus payment in lieu of notice — both count toward the genuine-redundancy component).
- Tax-free limit: $13,598 + ($6,801 × 12) = $13,598 + $81,612 = $95,210
- $80,000 is under the limit → the entire payout is tax-free, reported as Lump sum D, nothing withheld
With 12 years of service this is the typical outcome — the limit outruns the payout. Her $11,000 of unused annual leave is separate: taxed at up to 32%, so up to $3,520 on that part.
Example 2: $120,000 genuine redundancy, 8 years’ service, age 45 — part taxed as an ETP
David is made genuinely redundant after 8 complete years and receives $120,000.
- Tax-free limit: $13,598 + ($6,801 × 8) = $68,006
- Taxable ETP: $120,000 − $68,006 = $51,994 (code R)
- Under preservation age, well under the cap → 32% × $51,994 = $16,638 withheld
- David keeps $68,006 + ($51,994 − $16,638) = $103,356
Two things to notice. Because this is a code R payment, the $70,000 in wages David earned before redundancy doesn’t reduce anything — the ETP cap ignores other income. And if David were 61 instead of 45, the rate would be 17% — just $8,839 withheld, a difference of nearly $7,800. The preservation-age boundary is the biggest swing factor in ETP tax.
Example 3: $60,000 resignation package — and the new-job trap
Priya, 45, resigns with a $60,000 golden handshake. Not a genuine redundancy, so no tax-free component — the whole $60,000 is a code O ETP. She earned $55,000 in wages before resigning.
- Whole-of-income cap: $180,000 − $55,000 = $125,000
- $60,000 is under it → 32% × $60,000 = $19,200 withheld
Three months later Priya starts a new job and earns $120,000 before 30 June. The ATO recalculates her cap on the full year’s income:
- Recalculated cap: $180,000 − $55,000 − $120,000 = $5,000
- $5,000 at 32% = $1,600; the remaining $55,000 at 47% = $25,850 → total $27,450
- Only $19,200 was withheld → $8,250 extra owing at tax time
This is the most expensive surprise in the ETP system, and it only hits code O payments. Leaving with a handshake-style package and planning to work again this year? Ask your new employer to withhold extra tax from your wages.
Common mistakes
1. Assuming the whole payout is tax-free. The limit covers only the genuine-redundancy component. Annual leave, long service leave and wages in your final pay are always taxable. Work from the itemised breakdown, never the headline figure.
2. Treating a resignation package as a genuine redundancy. The ATO’s test is about the job, not the person: the employer must have decided the position no longer exists, and you were dismissed because of it, while under Age Pension age. Employer-run voluntary redundancy programs generally qualify; resigning because you saw the writing on the wall does not.
3. Forgetting the whole-of-income cap moves. Your employer withholds using only the taxable payments it made. The ATO recalculates at tax time on everything. A new job, a second ETP or investment income in the same year can push part of a code O payment into the 47% bracket after the fact.
4. Missing the 12-month rule. Concessional rates only apply if you receive the payment within 12 months of termination. A delayed payment — a drawn-out dispute settlement, say — is taxed at marginal rates unless the ATO approves an extension. Chase outstanding money before the window closes.
5. Leaving the invalidity segment or pre-1983 service in the taxable pile. Amounts relating to permanent disability (the invalidity segment) or to service before 1 July 1983 are tax-free components — they don’t count toward the ETP cap either. These get missed on payment summaries; check before you lodge.
6. Trying to roll the ETP into super. The law blocks ETPs from being rolled over or salary-sacrificed into super. The legitimate alternative is a personal deductible contribution from the after-tax proceeds (see tips).
Tips to keep more of your payout
Mind which financial year the money lands in. The flat ETP rates don’t change with timing, but the whole-of-income cap does: if you’ll be re-employed soon, having a code O payment land in a lower-income year keeps more of it in the 32%/17% band. Marginal-rated leave benefits even more from a low-income year — and the new 15% first bracket makes one cheaper than it used to be.
Use carry-forward concessional super contributions. You can’t roll the ETP into super, but you can make a personal contribution and claim the deduction — using unused cap space from the previous five years. A redundancy year is often the best time to catch up, because the deduction lands against your highest-taxed income. See our carry-forward super contributions guide and model it with our super calculator.
Check your income statement before you lodge. The tax-free amount should show as Lump sum D, the ETP should carry the right code (R vs O changes the cap), and any invalidity or pre-1983 segments should be carved out as tax-free. Errors are the employer’s to fix via an amended statement — far easier before you lodge than after.
Don’t forget the Medicare levy. The 32%/17%/47% rates already include it, but the levy still applies to the rest of your taxable income, including Lump sum A and B. Our Medicare levy explainer covers the thresholds and exemptions.
Get advice on packages over $270,000. Above the ETP cap every extra dollar is taxed at 47% — structure and timing genuinely matter there. If the payout also interacts with tax offsets or a planned super withdrawal, model the combined position first.
Frequently asked questions
Will my employer withhold the right amount of tax?
On the ETP itself, usually yes — the rates are flat and employers follow the ATO’s Schedule 11 tables. Where it goes wrong is the whole-of-income cap: your employer can only base it on what it paid you. Later income — a new job is the classic case — shrinks the cap at tax time, leaving extra owing. Withholding on a code R genuine-redundancy ETP is final if the figures were right, since other income doesn’t touch that cap.
Is a voluntary redundancy package a genuine redundancy for tax?
It can be. “Voluntary” describes how you left; “genuine” describes why the job ended. If your employer ran a voluntary redundancy program because positions were genuinely being abolished, and you were under Age Pension age, the payment generally qualifies. If you simply chose to resign — even with a negotiated payout — it doesn’t, and the whole amount is a code O ETP.
Can I salary sacrifice my payout into super?
Not the ETP portion — the law blocks ETPs from being rolled over or salary-sacrificed into super. You can receive the after-tax payout and then make a personal deductible super contribution, if you’re eligible and have cap space — including unused cap from the previous five years under the carry-forward rules. That’s a contribution you make and claim, not a rollover, and the distinction matters to the ATO.
Does my taxable ETP affect my HELP/HECS repayments?
Yes. The taxable ETP component is assessable income and counts toward your repayment income for HELP, VET Student Loan and other study loans. A large ETP can push you into a higher compulsory repayment rate — or trigger repayments in a year you weren’t expecting. Factor it in alongside the income tax.
What if I start a new job in the same financial year?
For a code R genuine-redundancy ETP: nothing changes — the cap ignores other income. For a code O payment: your whole-of-income cap shrinks by every dollar of new taxable income, and ETP pushed above it is taxed at 47%. Example 3 above shows a $60,000 handshake becoming an $8,250 tax-time shortfall this way. Ask your new employer for additional withholding.
What if my ETP is paid more than 12 months after I finish?
You lose the concessional rates — the payment is taxed at ordinary marginal rates (the ATO calls these delayed termination payments). If a payment is dragging, follow it up before the 12 months expire; the ATO can approve an extension in limited cases, but don’t count on it. The ATO’s employment termination payments guide has the full detail.
Wrapping up
Redundancy tax in 2026–27 comes down to three numbers: your tax-free limit ($13,598 + $6,801 per year of service), your ETP cap ($270,000), and — for handshake-style packages — your whole-of-income cap ($180,000 minus everything else you earn). Split the payout into its components, check the codes on your income statement, and watch the new-job trap on code O payments. Do that, and the withheld amount should land very close to the final bill.
