What is redundancy?
Redundancy occurs when an employer no longer needs a job to be performed by anyone. It can also happen if a business becomes insolvent or goes bankrupt.
A role may become redundant for several reasons, including when a business:
Closes down operations
Introduces new technology that replaces certain tasks
Experiences lower sales or production levels
Relocates interstate or overseas
Restructures after a merger, takeover or organisational change
If a position genuinely no longer exists, the situation may be classified as genuine redundancy under Australian workplace law.
A dismissal is generally not considered genuine redundancy if the employer still requires the job to be performed by someone else, such as hiring another employee to do the same role.
Because these situations can be complex, the Fair Work Ombudsman provides detailed guidance on redundancy and employee rights.
If an employer becomes insolvent or enters liquidation, employees may be able to claim certain unpaid entitlements through the Fair Entitlements Guarantee (FEG) scheme administered by the Australian Government.
However, unpaid employer superannuation contributions cannot be claimed through FEG. In those situations, employees may need to contact the business administrator or the Australian Taxation Office (ATO) regarding unpaid super.
What payments may be included in redundancy pay?
The payments received following redundancy can depend on the employee’s contract, industrial agreement or applicable workplace award.
A genuine redundancy payment may include:
Payment in lieu of notice
Severance pay, which may be calculated based on years of service
A discretionary payment sometimes referred to as a gratuity or golden handshake
Some payments that are made when employment ends are not considered part of a genuine redundancy payment, including:
Salary, wages or allowances owed for work already completed
Lump sum payments for unused annual leave or leave loading
Lump sum payments for unused long service leave
Payments made instead of superannuation benefits
Are redundancy payments tax free?
In Australia, certain genuine redundancy payments may receive tax-free treatment up to a specific limit.
The tax-free amount is generally calculated using:
A base tax-free threshold, plus
An additional amount for each completed year of service with the employer.
Amounts above the tax-free threshold may be taxed depending on how the payment is classified.
Because the tax treatment of termination payments can vary, the Australian Taxation Office provides detailed information about how different components may be taxed.
How redundancy payments are typically categorised
Redundancy payments often include several different components. Each component may be treated differently for tax purposes.
1. Employment termination payments (ETPs)
Some payments made when employment ends are classified as employment termination payments, commonly referred to as ETPs.
Examples may include severance payments or gratuities. These payments are generally taxed at concessional rates up to a specific cap, depending on the type of payment.
2. Accrued leave payments
Unused leave, such as annual leave or long service leave, is usually paid out when employment ends.
These payments are typically separate from ETPs but may still receive concessional tax treatment under certain circumstances.
3. Genuine redundancy payments
The portion of a payment that qualifies as a genuine redundancy payment may be tax free up to the applicable limit, which depends on years of service.
4. Tax-free components of ETPs
Some employment termination payments may contain a tax-free component, for example if part of the payment relates to invalidity or service before 1 July 1983. No tax is withheld from this portion.
When redundancy payments must be made
To qualify for concessional tax treatment, an employment termination payment generally needs to be paid within 12 months of employment ending.
If payments are made outside this timeframe, they may be treated differently for tax purposes and could form part of assessable income.
Employers typically calculate the breakdown of redundancy and termination payments and withhold any required tax before issuing payment summaries or income statements.
These figures are often reported to the Australian Taxation Office and may appear in pre-filled tax return information through myGov.
Tools and resources for redundancy calculations
Several government resources can help people understand redundancy entitlements.
The Fair Work Ombudsman’s Pay and Conditions Tool (PACT) allows users to estimate redundancy pay and other entitlements, including unused leave.
The Australian Taxation Office also provides guidance on how termination payments and redundancy payments are taxed.
Managing the financial impact of redundancy
Losing a job can be a difficult and uncertain experience. Redundancy often brings financial and lifestyle changes, particularly when income suddenly changes.
Many Australians review their finances, reassess budgets and explore available support options when navigating employment transitions.
Understanding how redundancy payments work and how they may be taxed can help people make more informed financial decisions during this period.
For those looking to better understand their overall financial situation, digital financial tools can assist with areas such as budgeting, debt management, savings and superannuation planning.
Platforms like Otivo help Australians explore their financial position and access licensed financial advice tools designed to support financial wellbeing.