When employment comes to an end due to redundancy, both employers and employees must understand how the Australian Tax Office (ATO) treats redundancy payments. A genuine, or bona fide, redundancy may entitle an employee to a tax-free payment, depending on specific eligibility conditions.
At Certum Advisory, we help clients navigate these complex rules with confidence and compliance.
What Is a Bona Fide Redundancy?
A bona fide redundancy occurs when an employee’s position is genuinely made redundant, meaning the role is no longer required, and the decision is not based on performance, conduct, or voluntary resignation.
To qualify as a bona fide redundancy under ATO guidelines:
- The termination must be genuine, not contrived to access tax benefits.
- The employee must be under the prescribed age limit (usually the age pension age) at the time of termination.
- The employee must not be re-employed in another role within the organisation
Tax Treatment and Benefits
The ATO provides a tax-free threshold for genuine redundancy payments. The tax-free portion is calculated based on the employee’s years of continuous service.
The formula is:
Tax-Free Limit = Base Amount + (Service Amount × Years of Service)
For the 2024–25 financial year:
- Base amount: $12,524
- Service amount: $6,313 for each completed year of service
Example:
An employee with 5 years of service could receive up to:
$12,524 + ($6,313 × 5) = $44,089 tax-free
Any amount above this threshold is taxed as an Employment Termination Payment (ETP) and is subject to different tax rates depending on the employee’s circumstances.
Documentation Is Key
To ensure compliance and entitlement to tax concessions, both employers and employees should maintain clear records, including:
- Written notice of redundancy
- Employment contract and termination details
- Payment breakdown (tax-free and taxable portions)
Proper documentation ensures smooth reporting during tax return preparation and protects against ATO disputes.
Certum Insight
Understanding redundancy payments early can help employees plan their finances and employers manage their obligations effectively.
At Certum Advisory, our tax specialists work closely with individuals and businesses to:
-Confirm eligibility for tax-free redundancy components
-Calculate and structure payments correctly
-Ensure full compliance with ATO regulations
Next in the Series
In Part 2, we’ll explore how to calculate the tax-free portion of a redundancy payment, including practical examples and ATO reporting tips.
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