The 2026–27 redundancy tax-free limit and ETP tax

1. The tax-free part of a genuine redundancy

Applies to the redundancy payment and payment in lieu of notice, for a genuine redundancy before age 67 (or the pension age). The employee must not be re-hired for the same role; the payment must exceed what would be paid on voluntary resignation.

The ATO test for a genuine redundancy payment is distinct from the Fair Work test. Four conditions must all be met. The payment is received in consequence of a dismissal, meaning the employer ended the employment. The dismissal is caused by the position being genuinely redundant, not by the employee’s performance or conduct. The employee is dismissed before reaching pension age. And the payment is not more than what would reasonably be expected on an arm’s-length basis; where there is an arrangement to re-employ the person after the dismissal, the concession is lost. Only the part of the payment that exceeds what the employee would have received on voluntary resignation is a genuine redundancy payment: contractual notice that would have been paid on resignation, for example, is not. Both base and per-year amounts are indexed to average weekly ordinary time earnings each 1 July, so the limit for a dismissal in June differs from one in July.

Which payments share the limit

2. The excess: employment termination payment

An employment termination payment is any lump sum paid in consequence of the termination that is not salary, leave or a genuine redundancy payment. It must be paid within twelve months of the termination to qualify for the concessional rates; a late payment is taxed at marginal rates. The concession works through a tax offset: the ETP is included in assessable income, and an offset reduces the tax so that the effective rate does not exceed 30% or 15% plus Medicare on the amount within the cap. Because the ETP is still assessable income, it raises adjusted taxable income for the year, with consequences for the Medicare levy surcharge, HELP repayments, family tax benefit and the private health rebate. The ETP cap of $270,000 is indexed annually. The whole-of-income cap of $180,000 is not indexed and is reduced by all other taxable income of the year, including salary earned before the termination and the taxable part of leave; for a non-excluded ETP, whichever cap is lower applies.

Excluded and non-excluded ETPs

Excluded ETPs are the excess over the tax-free limit of a genuine redundancy, early retirement scheme or invalidity payment, plus compensation for personal injury, unfair dismissal, harassment or discrimination, and death benefits. They get the full ETP cap. Non-excluded ETPs are everything else: golden handshakes, gratuities, payments for unused sick leave or rostered days off, payment in lieu of notice on a resignation or non-redundancy dismissal, and restraint of trade payments. They are limited by the whole-of-income cap, which for a high earner dismissed late in the year can be zero, so that the whole payment is taxed at 47%. Where an employee receives both types in one year, the excluded ETP uses the cap first.

3. Leave payments

Unused annual leave and long service leave paid out on a genuine redundancy are withheld at a flat 32%. On any other termination they are taxed at marginal rates (2026–27: 0% to $18,200, 15% to $45,000, 30% to $135,000, 37% to $190,000, 45% above, plus 2% Medicare).

The 32% withholding on a genuine redundancy is a concession that becomes a ceiling in the tax return: the leave is reported as a lump sum A with code R, and the tax on it is capped at 30% plus Medicare through an offset, regardless of the employee’s marginal rate. For a high earner with a large leave balance, that is a real saving compared with marginal rates; for a low earner it is a refund at tax time. On a resignation, the employer withholds using the marginal rate tables on the whole leave payment as if it were earned over the pay period, which often over-withholds and is reconciled in the return. Long service leave accrued before 16 August 1978 is 5% assessable, and leave accrued between then and 17 August 1993 is capped at 30% plus Medicare whatever the reason for termination.

Worked example

An employee aged 50 with 12 completed years on $110,000 is made redundant on 1 September 2026–27 with 20 weeks of redundancy pay under an enterprise agreement, 5 weeks of notice in lieu, 15 days of annual leave with 17.5% loading and 10.4 weeks of long service leave. Redundancy and notice total 25 weeks at $2,115 a week, $52,885. The tax-free limit is $95,210; the balance of -$42,325 is an excluded ETP taxed at 32%, being under preservation age. Annual leave of $6,346 plus $1,111 loading and long service leave of $21,996 are withheld at 32%, $9,425. The net final pay is therefore $52,885 + $7,457 + $21,996 minus the ETP tax and the leave tax. In the tax return, the leave and the ETP appear as assessable income with offsets, and the tax-free amount does not appear at all.

Reporting and paperwork

1. The employer reports the termination through Single Touch Payroll; the income statement in myGov shows the tax-free amount, the ETP with code R or O, and lump sum A with type R or T.
2. Check that redundancy and notice in lieu are coded R (genuine redundancy) rather than O; the wrong code costs the tax-free limit and the higher cap.
3. Lodge the return with the ETP and lump sum amounts pre-filled; the ATO calculates the offsets.
4. If the employer refused to treat the redundancy as genuine, apply to the ATO for a private ruling or object to the assessment within two years.

The final pay calculator applies the limit, the ETP rates and the 32% leave withholding according to the reason for termination, age and completed years you enter.