How are redundancy payments taxed?

Genuine redundancy payments are generally taxed at a different rate from ordinary income.

As a rule of thumb, the longer you have been with your employer the less tax you will pay on your redundancy payout.

A genuine redundancy occurs where an employee is dismissed due to their position being abolished. If a redundancy meets all the conditions of a genuine redundancy, part of that payment will be tax free.

The tax-free amount is made up of a base limit, plus a component for each completed year of service. For the 2014 financial year, the base limit is $9246 plus $4624 per completed year.

For example, 15 years of service will result in a tax-free payment of $78,606 [$9246 + (15 x $4624)].

The balance of any payment over the tax-free amount is treated as an eligible termination payment (ETP) and is taxed at lower rates but varies according to your "preservation" age.

Preservation age is that at which a person can access super benefits. If you are above preservation age you pay a maximum of 16.5% on an ETP up to $180,000. If you are below preservation age you pay a maximum 31.5% up to $180,000. Regardless of age, if the ETP exceeds $180,000 you pay 46.5% of the balance over $180,000.

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