As a tax accountant Melbourne, one of the most common questions we receive is: Do you pay tax on a redundancy payment?
The answer is yes, but not always on the entire amount. Depending on the circumstances, part of your redundancy payment may be received tax-free.
What Is a Genuine Redundancy?
A genuine redundancy occurs when your employer no longer requires anyone in your position and your employment is terminated as a result.
If the redundancy qualifies as genuine under Australian tax law, you may be entitled to a payout which is all or partly tax-free.
How Is a Redundancy Payment Taxed?
Tax on redundancy payment is generally split into two parts:
- Tax-free component – calculated under a formula set by the ATO based on your years of service.
- Taxable component – any amount above the tax-free threshold is generally taxed as an Employment Termination Payment (ETP).
What Parts Are Usually Taxable?
The following are generally taxable:
- Unused annual leave
- Unused long service leave
- Payment in lieu of notice
- Bonuses and incentive payments
These amounts are taxed under separate rules and do not form part of the tax-free redundancy amount.
Can You Reduce the Tax?
In some cases, making additional superannuation contributions may help reduce your tax on redundancy payment. Best to contact a tax accountant Melbourne , like Nobel Thomas, to discuss this strategy.
Frequently Asked Questions
Do I pay tax on a redundancy payment?
Part of a genuine redundancy payment will generally be tax-free while the other part will not. A genuine redundancy means that the role will not be filled by someone else. Best to contact a tax accountant Melbourne, like Nobel Thomas, to discuss further.
Is annual leave paid out tax-free?
No. Unused annual leave is taxable.
Is long service leave taxable?
Yes. Long service leave payments are taxable.
What happens if my redundancy payment exceeds the tax-free limit?
The excess is generally taxed as an Employment Termination Payment (ETP).
Need Advice?
Understanding the tax on redundancy payment rules can be complicated, particularly when large termination payments, leave entitlements and superannuation strategies are involved.
If you are looking for an experienced accountant Melbourne please do not hesitate to contact Nobel Thomas for personalised advice before accepting your redundancy package.
