The below figures have been updated for the 25/26 Financial Year
Bonafide Redundancy with Severance Pay and a Golden Handshake/Gratuity payment.
Redundancy happens when an employee is dismissed because the job they were doing has been abolished or the employer becomes insolvent or bankrupt.
For a Bona-fide/Genuine redundancy to be considered by the employer and to receive a concessional tax treatment, it must be one where:
The position has been abolished (no one will be reemployed in the position in the next 12 months).
An employee receiving a genuine redundancy payment must, at the time of dismissal, not have reached the pension age.
In the 2018–19 Mid-Year Economic and Fiscal Outlook (MYEFO), the government announced that it would extend the age at which employees can access concessional tax treatment for genuine redundancy and early retirement scheme payments, from the age-based limit of 65 years to Pension age. The change became law on 29 October 2019, and applies to payments made to employees who are dismissed or retire on or after 1 July 2019. Pension Age is 67 years for employees born after 01/01/1957, 66 years and 6 months for employees born between 01/07/1955 to 31/12/1956, 66 years for employees born between 01/01/1954 to 30/06/1955. Employee born before 1954 cannot receive genuine redundancy payment. Also check what the compulsory age for the particular position is, for example, if an employee in a particular position is required to retire at age 60, then the person can only receive a genuine redundancy payment if he or she is less than 60 years old when the dismissal occurs. The ATO has a good public ruling on this matter, which I suggest you have a read of: Refer TR2009/2 para 282 and 283 – Age Based Limits
There is no agreement for the employee to be re-employed by the employer or under an arrangement between the employer and a third party.
If the above conditions of redundancy have been met, it is then necessary to consider what amount is included in the genuine redundancy payment. Any payments that meet the conditions of a genuine redundancy are tax free up to a limit based on the years of service with the employer. The tax-free limit is a flat dollar amount plus an amount for each year of completed service in the period of employment with the employer. Indexation changes the tax-free limit on 1 July each year.
The following payments are not included in a genuine redundancy payment:
Salary, wages or allowances owing to the employee for work done or leave already taken.
Payments of unused annual leave or leave loading paid on termination of employment.
Payments of unused long service leave paid on termination of employment.
Payments made in lieu of superannuation benefits.
Once the amounts of the ETPs that are genuine redundancy payments have been determined, the maximum tax free values can now be calculated.
Tax free threshold
The tax-free amount is a flat dollar amount plus an additional amount for each completed year of service. The amount for the 2025/2026 financial year is: $ 13100 plus $ 6552 for each completed year of service.
Example:
Lisa’s position has been made redundant, she is 45 years old, the position has been abolished and there has been no agreement to reemploy her. She has completed 4 years of service with the company.
The ETP amounts, that qualify for the tax-free calculation, are:
Severance pay = $34,000
Payment in lieu of notice = $6,000
Maximum tax-free amount is:
$ 13,100 plus 4 x $ 6,552 = $ 39,308
Bona fide redundancy (Severance pay + In Lieu of Notice) amount = $40,000
Maximum tax-free amount (Lump Sum D) = $39,308
Remaining amount is an ETP and taxed at 32% = $692.00
If Lisa were to also receive $500 for unused time in lieu/ADO, then this amount will be added to the remaining ETP amount, e.g. Total ETP payable = $692 + $500 = $ 1192.00
The tax-free redundancy payment is Lump Sum D.
Unused Annual leave and leave loading paid out during redundancy is taxed at 32% and is Lump Sum A.
Unused Long Service Leave paid out during a bona fide redundancy is taxed at 32% and is Lump Sum A when the employee’s employment date is after 15/08/1978.
Note: If the employee started before 16/08/1978, the Long Service Leave will require splitting. The portion of the Long Service Leave accrued before 16/08/1978 is Lump Sum B and only 5% of the value is taxed at marginal tax rates.
Bona fide Redundancy with Severance Pay
Wages, Timesheet, enter all worked hours in the employee’s final pay period and click Next to get to the Adjustments screen.
On the left, select Termination, then Add. The Termination Wizard will launch, Next.
For Redundancy, on the Termination Information screen enter the Termination Date which is the last working day of the employee. The Employee's Birth Date and Employee's Tax File No will flow through from the employee file, if entered in the employee file. If Severance Pay is going to be paid to the employee, tick The Employee is to be Paid Severance Pay. Tick The Termination is Due to a Bona Fide Redundancy, Early Retirement Scheme, Permanent Disability or Death. Select the radio button Bona Fide Redundancy or Early Retirement Scheme, Next.
The Severance Pay will flow through directly from the employee's award to the Severance Pay screen. If you need to override the severance payment, overtype the hours or the dollar figure. Next.
On the Termination Notice screen, by default the radio button Sufficient Notice was Given by the Terminating Party is selected, change this to the Employer did not Give Sufficient Notice if the employee was asked to leave without working the notice period (this is the norm with Redundancies). You will see a tick box Include in Tax Free component of redundancy which will mean that the Payment in lieu of notice will be a Lump Sum D (not taxed) as opposed to an ETP taxed at ETP tax rates. If you are unsure if this box should be ticked or not, check with your Accountant or the ATO. Next.
The Annual Leave and Leave Loading screen shows the entitlements as at the termination date, based on the award the employee is linked to and balance within their employee file. These amounts can be adjusted if required, by overtyping the hours within the boxes. Next. The leave loading entitlement will ONLY flow through if the option is selected within the award to pay leave loading on termination. If the leave loading entitlement does not appear here, close the termination wizard and amend the settings within the applicable award in Setup, Award, Select the Award, Edit, Leave, Leave Loading, Select the Other Tab and tick Pay on Termination and select Treat as Leave Loading in the drop-down box.
Do not tick For PAYG taxation purposes treat this leave type as Leave Loading
When you reach the Long Service Leave screen of the Termination Wizard, you will be given a breakdown of long service leave due to the employee as at the termination date. If the values are correct, Next. If an entitlement period has been set and the employee is yet to reach the length of service, no values will appear here. If you wish to pay long service leave and there are no values on this screen, you must again close the termination wizard and amend the settings within the applicable award in Setup, Award, Select the Award, Edit, Leave, Long Service and select the Entitlement tab and enter a relevant entitlement period.
If you need to correct Long Service Leave your will need to start at step 1 again.
If any Additional Leave Payments are required to be paid on termination, tick the box to select the leave type to be paid. The hours appear as reflected in the employee file. This would typically apply to Accrued Days Off or Time in Lieu hours. Next.
Selection of an item on this screen will result in the amount appearing on an ETP payment summary and ta calculated at a different rate.
There are two methods for calculating Tax on Annual and Long Service Leave upon termination. Next.
Standard Method should be selected only when the employee has worked their normal hours in the pay period where the termination is processed.
If no days or only part of the normal hours have been worked in the pay period when the termination is processed, select the Average Pay over Preceding Year Method.
If there is any company Property the employee has in their possession and has not been returned, the value of the item can be deducted from the employee’s final pay by selecting the item on this screen. Next.
Any allowances such as Gratuity or Golden handshake to be paid on termination can be selected or added by right clicking on the Allowance and Other Items screen and selecting Add an ETP Item. Please note the amount will appear as an ETP payment. Next.
The Prior Life Benefit ETPs/WOIC is usually not applicable, Next.
The termination details screen will provide a comprehensive breakdown of the termination payment along with the tax applying to each component. This can be printed here or later printed from the employee file (Employee, Edit Employee, Select the employee, Employment, Notes and select the Termination tab). When you click Next on the Termination Details screen, a final Summary of the payment to be made to the employee will be shown. Click on Finish, then Next to preview the pay slip.
The payslip provides the employee with information in relation to the leave balance paid out, employment cessation date and any other details relating to the final payment.
Once the employee has been terminated at Wages, the termination date will filter through to the Employment screen within the employee file. A termination reason can also be entered on the employee’s Employment screen by typing in the Reason field or using a reason from the drop-down arrow.
Note: The grey shading of the box indicates that the termination was processed at Wages and this is irreversible. If subsequent payments are required, you can use the supplementary pay slip (if the termination date is within the current financial year) to process these. If the termination date is in a previous year, you will need to add the employee as a new employee.
Note: Please refer to the ATO’s website on permitted pay deductions from the employee’s final payout or termination payout.