Tax free amounts
Genuine redundancy and early retirement scheme payments are tax-free up to a limit based on the employee's years of service.
The tax-free amount isn't part of the employee's ETP. It's reported as a lump sum in the employee's income statement or PAYG payment summary – individual non-business.
Any amount over the tax-free limit is part of the employee's ETP.
2019 changes
In the Mid-Year Economic and Fiscal Outlook 2018–19 (MYEFO)This link will download a file, 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. The extension was from the age-based limit of 65 years to age-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.
If you paid an employee an ETP before 29 October 2019 and they were 65 years or older, they may have had more tax withheld than would be required under the new law. In these circumstances, you can revise the payment and refund the employee the excess tax withheld for any payment that qualifies as a genuine redundancy payment or early retirement scheme payment.
If you recalculate tax withheld and refund the difference to the employee, and you have already paid us the tax withheld through lodging your activity statement, you can revise the activity statement to show the corrected withholding amount for that period.
If you report through Single Touch Payroll (STP), you can make the reporting correction at the next pay event. This will correct the amount reported in the income statement.
If you need to make an amendment after you have finalised your STP, see Correcting information reported through STP.
If you're not yet reporting through STP and have issued a part year PAYG payment summary – individual non-business or PAYG payment summary – employment termination payment, you can't change the information on a PAYG withholding payment summary after you have given it to the payee or provided your PAYG payment summary annual report to us. For more information on amending a PAYG payment summary, see PAYG withholding payment summaries.
For more information see Genuine redundancy and early retirement scheme changes.
Example: Applying the change to payments made before 29 October 2019
Ruth was born on 31 January 1954. She was made redundant from XYZ Pty Ltd on 1 September 2019, when she was 65 years old. She was paid out more than she would have received had she resigned.
Ruth was over the age limit of 65 years old when she was dismissed, so her redundancy was non-genuine. XYZ applied the ETP cap to her payment and tax was withheld at 17%.
On 28 October 2019, legislation to change the age limits for a genuine redundancy – from 65 years old to age-pension age – receive royal assent. Ruth determines that her pension age under the new law is 66 years. She asks XYZ to review her redundancy payment.
With the changed age limits, Ruth's payment now meets the requirements for a genuine redundancy payment. It is tax-free up to the limit, based on her years of service.
XYZ, which reports through STP, refunds the extra tax withheld to Ruth. As XYZ had made their finalisation declaration they have to submit an update event.
End of exampleWorking out and reporting the tax-free amount
The tax-free limit is calculated as:
- base amount + (service amount × years of service)
The base amount and service amount are indexed annually.
For example, for 2023–24 the tax-free limit is equal to $11,985 (base amount), plus $5,994 (service amount) multiplied by the years of service. If there had been 10 years' service, the tax-free limit for the year ending 30 June 2024 is:
- $11,985 + ($5,994 × 10) = $11,985 + $59,940 = $71,925.
The tax-free component of a genuine redundancy or early retirement scheme payment is shown at lump sum D on the employee's income statement or PAYG payment summary – individual non-business.
Example: Genuine redundancy, tax-free component only
Moira is 42 and started working for EFG Pty Ltd on 3 July 2006. Moira is made redundant effective 15 August 2023 as the company merged with another company and her role was no longer needed. Moira is paid 2 weeks for each year of her 17 years of service, based on her weekly earnings of $2,000 (2 ×$2,000 ×17 = $68,000).
She is receiving a genuine redundancy, so she is entitled to the tax-free component. Following the 2023–24 base and service amounts previously mentioned, and her 17 years of completed service, the tax-free limit for Moira is $11,985 + ($5,994 × 17) = $113,833.
The amount Moira receives in redundancy payment ($68,000) is less than the amount she is entitled to a tax-free component ($113,883). This means the whole of Moira's redundancy payment is tax-free.
Moira won't receive an ETP payment summary. Her entire redundancy payment will appear on her income statement or individual non-business payment summary at lump sum D.
End of example
Example: Genuine redundancy
Sonya is a 54-year-old chief financial officer (CFO) who has been working for Green Waste for 10 years. In 2023–24, Green Waste is taken over by a larger company, which already has a CFO. Sonya’s position is no longer needed and her employment is terminated. She accepts a redundancy and is paid $190,000. $140,000 of this payment is due to being made redundant. Her other taxable income in 2023–24 was $200,000.
Sonya’s payment is a genuine redundancy payment because her position is no longer required. Even though the position of CFO still exists, the position does not need to be filled by 2 people.
The genuine redundancy part of Sonya’s payment is $140,000. The tax-free part of the payment is $71,925, based on her 10 years' service. The remaining $68,075 is subject to the ETP cap (not the whole-of-income cap) and is taxed concessionally because it is under the ETP cap.
The lesser of either the ETP cap or the whole-of-income cap applies to the remaining $50,000 ($190,000 − $140,000). Sonya also earned $200,000 other taxable income, so her calculated whole-of-income cap is zero and is the lower cap. As a result, Sonya’s ETP amount of $50,000 does not receive concessional tax rates and withholding is at the highest tax rate (47% in 2023–24).
End of exampleFor more information see:
- ETP caps – Tax table for employment termination payments
- PAYG payment summary – individual non-business
- Single Touch Payroll
Redundancy
Only a payment for a genuine redundancy is eligible for the tax-free limit. A genuine redundancy occurs when the employer has made a decision that the job no longer exists and terminates the employee's employment.
A payment for a non-genuine redundancy is taxed as part of the employee's ETP. A non-genuine redundancy occurs when the employee:
- is dismissed because they've reached normal retirement age
- is their age-pension age or older on the day of dismissal
- leaves voluntarily
- has their contract terminated
- is dismissed for disciplinary or inefficiency reasons.
Age-pension age
|
Date of birth |
Age-pension age |
|---|---|
|
Before 1 July 1952 |
65 years |
|
1 July 1952 to 31 December 1953 |
65 years and 6 months |
|
1 January 1954 to 30 June 1955 |
66 years |
|
1 July 1955 to 31 December 1956 |
66 years and 6 months |
|
On or after 1 January 1957 |
67 years |
For more information see Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments
Dismissal
Dismissal is the involuntary termination of an employee. It's the employer's decision that the employment will end, rather than the employee's decision to leave.
Provided that it's ultimately the employer's decision to cease employment, a dismissal can still occur when the employer offers a redundancy package to an employee to either:
- minimise disruption to other employees
- comply with industrial relations laws or a workplace agreement.
A redundancy is still considered genuine if the employer seeks expressions of interest from their employees before they decide which employee to dismiss.
Sometimes an employer places an employee in a position where there is little choice but to resign – for example, when the employer offers their employee any of the following:
- the choice between a package and another job that is different to their qualifications and experience
- a reduction in their pay
- dismissal without the benefits of a package.
In these situations, the dismissal is generally a non-genuine redundancy.
For more information see Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments
Early retirement scheme
An early retirement scheme is a plan that offers employees incentives to retire early or resign when the employer is rationalising or reorganising their business operations.
The scheme must meet certain conditions and be approved by us. We will provide approval to the employer as a class ruling. You can't start an early retirement scheme until you have the class ruling.
An early retirement scheme will generally be approved when it meets the following conditions:
- The scheme is available to broad groups of employees, such as all employees
- hired by the organisation
- who have reached a particular age
- with a particular occupational skill.
- The scheme is part of a plan to reorganise business operations. You must be able to show that you're implementing the scheme to achieve a specific short-term objective. A specific objective may include
- replacing employees with particular skills with employees who have different skills
- the closure, relocation or reduction in output of part of the business operations
- the introduction of new technology, processes, systems or productivity increases.
Your request for an early retirement scheme should be in writing and include:
- the date of effect (that is, the proposed timeline of the scheme)
- the employer's name and contact details
- a full and accurate description of the scheme
- a clear and accurate description of the class of persons subject to the scheme
- any supporting documents.
The request can be faxed to 1300 669 846 or mailed to
Australian Taxation Office
PO Box 3100
Penrith NSW 2740