Your redundancy letter shows one number. Your bank account shows another. And somewhere between the two, tax has been taken out in ways that are not obvious from your final payslip.

If you are thinking of using your payout to start a business, it matters which number you plan with. This guide explains, in plain terms, how redundancy pay is taxed in Australia and what that means for your business budget.

Your payout is usually several payments, not one

A redundancy payout often bundles together several different types of payment. Each one can be treated differently for tax. Look at your final payslip and separation letter for items like these:

  • Genuine redundancy pay, often calculated as a number of weeks’ pay for each year of service.
  • Payment in lieu of notice, if your employer did not ask you to work out your notice period.
  • Unused annual leave and leave loading.
  • Unused long service leave, if you had any.
  • Other amounts, such as a gratuity or “golden handshake”.

Your employer works out the tax on each part when they pay you. You then report these amounts in your tax return for that financial year.

What counts as a genuine redundancy

The tax-free treatment only applies to a genuine redundancy. The ATO says this generally means your job has been abolished, your employer has decided the job no longer exists, and you are under Age Pension age at the time.

Leaving voluntarily, being dismissed for performance or conduct, or reaching a normal retirement age are not genuine redundancies for tax purposes. Payments in those situations are taxed differently. The Fair Work Ombudsman also explains what a genuine redundancy means from an employment law point of view.

The tax-free part of a genuine redundancy payment

A genuine redundancy payment is tax-free up to a limit. The limit is made up of a base amount plus an amount for each complete year of service. It is indexed every 1 July.

For the 2026-27 financial year, the ATO lists the limit as:

  • Base amount: $13,598
  • Plus: $6,801 for each complete year of service

For example, someone with 10 complete years of service would have a tax-free limit of $13,598 plus 10 x $6,801, which is $81,608 for 2026-27. If you were paid in an earlier financial year, check the ATO page for that year’s figures, because they are lower.

The tax-free amount is not part of your employment termination payment and is not taxed. Your employer reports it separately on your income statement.

Amounts above the limit: employment termination payments

Any genuine redundancy pay above the tax-free limit, plus items like payment in lieu of notice, is treated as an employment termination payment (ETP). ETPs are taxed at concessional rates up to a cap.

The ATO’s ETP withholding table sets out the rates for the taxable component:

  • Under your preservation age: 32%, up to the relevant cap.
  • At or over your preservation age: 17%, up to the relevant cap.
  • Above the cap: 47%, at any age.

The same ATO table notes that preservation age is 60 for anyone born after 30 June 1964, and that anyone born before then has already reached it.

Which cap applies depends on the type of payment. The ATO explains that genuine redundancy amounts above the tax-free limit are taxed concessionally up to the ETP cap, which is $270,000 for 2026-27. Other payments, such as payment in lieu of notice or a gratuity, are taxed concessionally up to the smaller of the ETP cap and the whole-of-income cap of $180,000, which is reduced by your other taxable income for the year.

Unused leave is taxed separately

Unused annual leave and long service leave are not part of the genuine redundancy payment. They have their own withholding rules.

For unused annual leave and leave loading paid because of a genuine redundancy, the ATO’s guidance on withholding from unused annual leave sets a flat 32% withholding rate. Unused long service leave has its own rules, which can depend on when the leave was accrued. Ask your employer’s payroll team or a registered tax agent how yours was treated.

What this means for your business budget

Here is the practical part. Once you understand the tax, you can build a business budget on solid ground.

  1. Plan with the net amount. Use what actually arrived in your bank account, not the gross figure in your letter.
  2. Check your income statement after 30 June. Make sure the tax-free and taxable parts were reported correctly. Mistakes do happen.
  3. Think about the year as a whole. In the year you were made redundant, you may have salary, a payout and some early business income all in one tax return. Plan for that.
  4. Set aside tax on new business income. As a sole trader, nobody withholds tax for you. The ATO suggests setting money aside and considering voluntary PAYG instalments when you are new to business.
  5. Know the GST threshold. business.gov.au explains you must register for GST once your GST turnover reaches $75,000 or more. Below that, it is optional.
  6. Remember your super. Moneysmart notes that sole traders do not have to pay themselves super, though you can contribute voluntarily and may be able to claim a deduction.
  7. Check government payments. If you may claim Centrelink support, ask how your payout affects timing. Services Australia has information on the income maintenance period.

A good registered tax agent is worth paying for in the year of a redundancy. They can check your payout was taxed correctly and help you set up your new business records from day one. If you are considering a finance-related business yourself, our guide to starting an accounting or bookkeeping practice covers the registrations involved.

A quick tax checklist for your payout

  • Separation letter and final payslip filed safely
  • Each part of the payout identified: redundancy, notice, leave, other
  • Years of service confirmed and tax-free limit checked for the right year
  • Net amount received written down as your planning number
  • Income statement checked after 30 June
  • Tax agent booked for the year of redundancy
  • Plan in place for tax, GST and super on new business income

For more on planning your move from redundancy to running your own business, visit The Redundancy Pivot.

This article is general information only, not financial, tax or legal advice. Check your own situation with the ATO or a licensed adviser.

Next step

Once you know what you really have to work with, the next question is whether your idea can earn it back. That depends heavily on your local market.

Before you spend your payout, find out whether your idea will work where you live. Get free, localised research into your business idea from GrowOnline: your local competitors, what they charge, what their customers say and who lives in your area.