What Counts as a Termination Payment for Tax?
Not everything you receive when a job ends is taxed the same way. The ATO separates employment termination payments from other things paid at the same time. Getting the split right is what makes the calculator accurate.
| Taxed as an ETP | Not an ETP |
|---|---|
| A gratuity or golden handshake | Unused annual leave and long service leave payouts |
| Genuine redundancy above the tax-free limit | Genuine redundancy up to the tax-free limit |
| Severance pay and non-genuine redundancy | Salary, wages and allowances owed for work already done |
| Payment in lieu of notice of termination | Super benefits paid from a fund |
| Compensation for loss of job | Employee share scheme payments |
Source: ATO, payments that are ETPs and genuine redundancy payments. For notice and leave, use the final pay calculator.
Genuine Redundancy: The Tax-Free Amount
The ATO says a genuine redundancy is when your job is abolished, you no longer have a job and you are under age pension age (67). It is not genuine if you retire at normal retirement age, are pension age or older when dismissed, resign, finish a contract or are dismissed for discipline or inefficiency. A genuine redundancy payment is tax-free up to a limit and anything above it is an ETP. The limit is a base plus an amount for each completed year of service, and it is indexed every 1 July.
| Completed years | Tax-free limit 2026-27 | Tax-free limit 2025-26 |
|---|---|---|
| 1 year | $20,399 | $19,652 |
| 2 years | $27,200 | $26,204 |
| 3 years | $34,001 | $32,756 |
| 5 years | $47,603 | $45,860 |
| 8 years | $68,006 | $65,516 |
| 10 years | $81,608 | $78,620 |
| 15 years | $115,613 | $111,380 |
| 20 years | $149,618 | $144,140 |
$13,598 + $6,801 × completed years (ATO, employment termination payments, updated 17 April 2026). The 2025-26 column is for payments made before 1 July 2026.
Worked example. After 6 completed years, a $60,000 genuine redundancy payment has a tax-free limit of $54,404, so $54,404 is tax-free and $5,596 is an ETP. Under preservation age that is taxed at 32%, which is $1,791 of tax, leaving $58,209. At preservation age or over the rate is 17%, which is $951. To see the redundancy pay you are owed in the first place, use the redundancy pay calculator.
ETP Tax Rates and the ETP Cap
The taxable part of an ETP is taxed at a flat concessional rate up to the ETP cap, then at the top marginal rate. The ATO’s withholding rates include the 2% Medicare levy.
| Situation | Tax rate |
|---|---|
| Reached preservation age (60) by the end of the income year, up to the cap | 17% |
| Under preservation age, up to the cap | 32% |
| Above the $270,000 cap | 47% |
ETP cap $270,000 for 2026-27 ($260,000 in 2025-26), indexed each year. Preservation age is 60 for anyone born after 30 June 1964.
The Whole-of-Income Cap for Golden Handshakes and Other ETPs
A genuine redundancy above the tax-free limit is an “excluded” ETP and only the $270,000 ETP cap applies. Every other ETP, such as a golden handshake, severance or a non-genuine redundancy, is also tested against a $180,000 whole-of-income cap, reduced by your other taxable income in the same income year, whether you earn it before or after the payment. The lesser of the two caps applies. Other taxable income counts salary, overtime, bonuses, interest and accrued leave paid out when you leave. It does not count super guarantee, salary sacrifice or reportable fringe benefits.
Worked example. A $100,000 golden handshake is paid in August to someone under preservation age who had earned $25,000 that year, so the cap is $155,000 and the whole payment is taxed at 32%: $32,000. If they then take a new job and earn a further $60,000 before 30 June, their other income is $85,000, the cap falls to $95,000 and $5,000 is taxed at 47%. The tax becomes $32,750, so the extra $750 is due when the return is assessed. This follows the ATO’s own worked example for the cap, using the 2026-27 cap and rates.
Practical Points
- Split the payment correctly. Check the payment summary or income statement. Leave and notice pay are separate lines from the redundancy payment.
- Timing matters. The caps are by income year (1 July to 30 June). Two ETPs in one year share the caps.
- Check your age cut-offs. Turning 60 before 30 June moves the rate from 32% to 17%. Being 67 on the day of dismissal removes the genuine redundancy tax-free amount.
- Centrelink. A termination payment can delay income support. See the JobSeeker payment calculator and the redundancy page for the income maintenance period.
Related Calculators and Guides
- Redundancy Pay Calculator: what you are owed under the NES
- Final Pay Calculator: notice, leave and wages when you leave
- Bonus Tax Calculator: tax on a one-off lump sum
- Long Service Leave Calculator: payout on redundancy by state
- Income Tax Calculator: tax on the rest of your year
Frequently Asked Questions
Termination payment tax questions and answers
How is a termination payment taxed in Australia?
An employment termination payment (ETP) is taxed at 17% (including Medicare levy) if you have reached preservation age (60) by the end of the income year, or 32% if you have not, up to the ETP cap of $270,000 for 2026-27. Anything above the cap is taxed at the top rate, 47%. A genuine redundancy payment is tax-free up to a limit before any of this applies.
How much of a redundancy payment is tax-free?
For a genuine redundancy in 2026-27 the tax-free limit is $13,598 plus $6,801 for each completed year of service. With 6 completed years that is $54,404. The limit was $13,100 plus $6,552 in 2025-26 and is indexed each 1 July.
What makes a redundancy genuine for tax purposes?
The ATO says a genuine redundancy is when your job is abolished, you no longer have a job and you are under age pension age. It is not genuine if you are dismissed because you reach normal retirement age, are age pension age or older on the day of dismissal, leave voluntarily, your contract ends, or you are dismissed for disciplinary or inefficiency reasons.
What is the ETP cap for 2026-27?
$270,000, up from $260,000 in 2025-26. The ETP cap is indexed each year. The amount of an ETP up to the cap is taxed at the concessional rate and the amount above it at the top marginal rate.
What is the whole-of-income cap?
A separate $180,000 cap that applies to ETPs that are not excluded, such as a golden handshake or a non-genuine redundancy. It is reduced by your other taxable income in the same income year, whether earned before or after the payment, and the lesser of it and the ETP cap applies. The part of a genuine redundancy above the tax-free limit is an excluded ETP and is tested only against the ETP cap.
Is a payment in lieu of notice taxed as an ETP?
Yes. The ATO lists payments in lieu of notice of termination as ETPs. If the payment is part of a genuine redundancy it counts towards the tax-free limit first. Notice you worked, and salary owed for work done, are ordinary pay and not ETPs.
Is unused annual leave or long service leave taxed as an ETP?
No. The ATO says payments for unused annual leave and long service leave are not ETPs. They are taxed under their own rules and also count as other taxable income for the whole-of-income cap. Use the final pay calculator for the leave part of a payout.
Who pays the tax, and when?
Your employer withholds the tax from the payment at the ETP rates and reports it to the ATO. When your tax return is assessed the ATO checks the caps against your full-year income. If you earn more taxable income later in the same financial year, for example from a new job, the whole-of-income cap can fall and you may owe extra tax on the ETP.
Do I get a tax-free amount on a golden handshake or non-genuine redundancy?
Not under the genuine redundancy rules. The tax-free base and per-year amount apply only to a genuine redundancy or an early retirement scheme payment. A golden handshake or non-genuine redundancy is an ETP from the first dollar, although a tax-free component can exist in some other cases, which the ATO explains on its tax-free component of ETPs page.
How we worked this out▼
For a genuine redundancy, tax-free = the lesser of the payment and $13,598 + $6,801 × completed years. The remainder is an excluded ETP, taxed at 17% (preservation age 60 reached by 30 June) or 32% up to the $270,000 ETP cap and 47% above it. Any other termination payment has no tax-free part and the cap is the lesser of the ETP cap and $180,000 less your other taxable income.
Not modelled: pre-1983 and invalidity components, early retirement scheme payments, earlier ETPs in the same year, ETPs paid on death, and the Medicare levy surcharge. The tax withheld can differ from your final assessment. General information, not tax advice.
Sources & References
- 1Genuine redundancy payments— Australian Taxation Office
- 2Employment termination payments: key rates and thresholds— Australian Taxation Office
- 3Payments that are ETPs— Australian Taxation Office
- 4Working out the whole-of-income cap amount— Australian Taxation Office
- 5Taxation of termination payments— Australian Taxation Office
Last verified: 5 October 2026. Our content is based on the latest information from official Australian government sources.
Anita Bell
AuthorFounder & Senior Bookkeeper
Accountancy degree (2015); certified in Xero, QuickBooks Online, MYOB, Saasu, Zoho and Reckon One
Anita Bell earned her accountancy degree in 2015 and has worked as a senior bookkeeper with Prime Bookkeeping for over 5 years. This built her skills in Australian and New Zealand tax legislation and industry regulations. She is certified in Xero, QuickBooks Online, MYOB, Saasu, Zoho and Reckon One, and works with payroll and rostering software including Gusto, Deputy, Tsheets and KeyPay. She has strong experience in hospitality, building and construction, financial services, real estate, ecommerce, and medical and health services.
Areas of Expertise