Redundancy entitlement and tax treatment are different tests

Workplace law determines what the employer must pay under the National Employment Standards, an award, enterprise agreement, employment contract or workplace policy. Tax law then characterises each amount. A payment can be legally owing but not tax free, and the tax-free formula does not create an employment entitlement.

This calculator keeps the two questions visible. It uses completed service to select the NES redundancy weeks and base weekly pay to estimate the NES amount. It separately calculates minimum notice weeks and multiplies them by full weekly pay. Then it adds entered extra severance and leave amounts to show a gross package.

For tax screening, the calculator treats redundancy pay, extra severance and payment in lieu of notice as a candidate genuine redundancy pool. This is only an assumption. A genuine redundancy payment must satisfy the statutory conditions, and only the part exceeding what could reasonably be expected on voluntary termination can qualify. The ATO notes that pay in lieu can qualify when it would not be expected on voluntary termination.

National Employment Standards redundancy weeks

For an employer covered by the national workplace relations system and not excluded as a small business employer, the Fair Work Ombudsman publishes the following minimum scale. Service is continuous service for the entitlement, which does not always equal calendar time since first engagement.

The reduction from 16 weeks at nine years to 12 weeks at ten years is part of the published NES scale. Do not “correct” it by extending the earlier progression. An award or agreement can provide a different or more generous entitlement.

Redundancy pay uses base pay for ordinary hours. Fair Work explains that this base rate excludes incentive payments and bonuses, loadings, monetary allowances, overtime, penalty rates and other separately identifiable amounts. The weekly base input should therefore not automatically be total average earnings.

Most small business employers with fewer than 15 employees do not have to provide NES redundancy pay, but some awards contain industry-specific obligations and other exceptions can apply. Selecting fewer than 15 employees sets NES redundancy weeks to zero; it does not decide the employee has no entitlement from another source.

Notice is calculated on a separate scale

Under the NES, an employee with one year or less of service generally receives one week of notice; more than one and up to three years receives two weeks; more than three and up to five years receives three weeks; and more than five years receives four weeks. An employee older than 45 who has completed at least two years of service receives an additional week.

An employer can require the notice period to be worked or provide payment in lieu, subject to the applicable rules. Fair Work says payment in lieu must equal the full amount the employee would have earned during the minimum notice period, including relevant bonuses, loadings, allowances, overtime, penalty rates and other separately identifiable amounts. That is why the notice input is separate from base weekly pay.

Notice exceptions exist for casuals, some fixed-term or seasonal employees, serious misconduct and specified arrangements. Awards, agreements or contracts may require longer notice. The calculator applies only the general NES table and does not determine an exception.

If notice is worked, employment continues and leave or service may accrue according to the applicable rules. If employment ends immediately with payment in lieu, the timing can differ. Do not add the calculator’s pay-in-lieu line when the employee will work the notice and receive normal wages instead without understanding the package.

2026–27 genuine redundancy tax-free limit

For the Australian income year from 1 July 2026 to 30 June 2027, the indexed tax-free formula is $13,598 plus $6,801 for each completed year of service. The service component uses complete years, so the additional months entered do not increase the tax-free limit.

The tax-free amount is not assessable income and is not exempt income when all genuine redundancy conditions are met. An excess may be an employment termination payment, commonly subject to concessional treatment only up to applicable caps and conditions. ETP tax depends on age, payment type, timing, taxable component, ETP cap, whole-of-income cap and current withholding schedule.

The default 32% is not a legal rate recommendation. It is an editable sensitivity input. Medicare levy treatment and the exact withholding percentage can vary. Use the employer’s payment summary or income statement codes, current ATO Schedule 11 and professional advice.

The formula can change each income year. Use the year in which payment is made and verify the indexed amounts. A package negotiated in one year but paid in another may require the later year’s rules, while other timing conditions can matter.

When redundancy is genuinely redundant for tax

The ATO describes a genuine redundancy as a dismissal because the employee’s position is genuinely redundant. The job is no longer required to be performed by anyone, rather than the employer simply replacing the individual. A resignation, retirement, dismissal for performance or expiry of a fixed arrangement does not become genuine redundancy because the payment is labelled severance.

The payment must exceed what the employee could reasonably expect on voluntary termination. Contractual amounts payable on resignation can therefore be outside the genuine redundancy component. There must not be an arrangement to employ the person after dismissal, and age or compulsory retirement conditions can affect qualification. Non-arm’s-length payments are limited to a reasonable amount.

A payment in lieu of notice can be part of a genuine redundancy payment when it would not be expected on voluntary termination, according to ATO Taxation Ruling TR 2009/2. The outcome depends on the contract and facts. This page includes all modelled notice pay in the candidate pool only so the possible upper split can be explored; it does not decide the condition.

Payments in lieu of superannuation benefits are excluded. Unused annual leave and long service leave are also carved out and handled separately. Outstanding wages, reimbursements, superannuation, bonuses and accrued rostered days can each require their own classification.

Reconcile every line in the final pay

Request a written breakdown showing the termination date, notice, redundancy weeks and rate, extra severance, outstanding ordinary wages, annual leave and loading, long service leave, time off in lieu, rostered days, expenses, deductions, tax withheld and superannuation treatment. Compare it with the award, agreement, contract and payslip balances.

Check continuous service carefully. Some unpaid leave does not count toward the length of service for redundancy, although it may not break continuity. Casual service, apprenticeship time, transfers of employment, changes in business ownership and service before 1 January 2010 can have special rules.

Confirm employer size at the time notice is given and how associated entities or employees are counted under the relevant definition. Do not rely solely on the headcount in one workplace. If the employer seeks to reduce redundancy pay because it found other acceptable employment or cannot afford the full amount, an application to the Fair Work Commission may be required.

Review payment timing. Fair Work rights, ETP timing rules, income-year thresholds and reporting can all depend on dates. Keep the termination letter, calculations, payslips, employment agreement, award or enterprise agreement, income statement and payment evidence.

Plan cash flow after redundancy

A gross package is not the amount available for long-term spending. Set aside any uncertain tax, compare the employer’s withholding with a full-year tax estimate, preserve an emergency fund and list essential commitments. Losing employment can change income for family assistance, child support, insurance, loan hardship and other systems on different timelines.

Check superannuation and insurance promptly. Employer contributions, salary continuance, life and total and permanent disability cover can change after employment ends. Do not roll over or close accounts without understanding insurance consequences.

If the employer is insolvent and cannot pay entitlements, the Australian Government Fair Entitlements Guarantee may cover eligible amounts subject to caps and exclusions. Fair Work’s fact sheet lists categories including wages, annual leave, long service leave, payment in lieu of notice and redundancy pay. Applications have conditions and time limits.

Seek help early for a disputed redundancy, consultation failure, discrimination, adverse action or dismissal. Different claims have short filing deadlines. A union, employment lawyer, Fair Work Ombudsman, Fair Work Commission, registered tax agent or financial counsellor serves different parts of the problem.