When making redundancy payments, employers and payroll managers must understand what can be included in the tax-free portion known as Lump Sum D. Lump Sum D applies to the tax-free component of a genuine redundancy or early retirement payment, within the limits set by the Australian Taxation Office (ATO).
Here’s a guide to understanding what qualifies, including eligibility criteria and how to calculate the tax-free threshold.
1. What Can Be Included in Lump Sum D?
Redundancy-only payments
A payment can only go into Lump Sum D if the employee is receiving it solely because of the redundancy. This means any additional payments the employee wouldn’t have received if they voluntarily resigned can be included as Lump Sum D, up to the ATO limit.
Determining pay in lieu of notice
Pay in lieu of notice can sometimes be included in Lump Sum D if the redundancy is genuine, but only if the employee would likely have worked the notice period had they resigned.
- If the employee would have worked the notice period on resignation: Pay in lieu of notice on redundancy may be included in Lump Sum D (tax-free).
- If they would have been paid in lieu upon resignation: The notice pay must remain a non-excluded ETP (code “O”), as it isn’t an additional payment arising solely from the redundancy.
Examples
- Sales teams: Sales employees are often asked to leave immediately upon resignation. Therefore, if they are made redundant, pay in lieu of notice should be reported as a non-excluded ETP (code “O”).
- Administration staff: Administration employees are generally required to work out their notice period if they resign. If made redundant, their pay in lieu of notice may qualify for Lump Sum D, as it would be an additional payment they wouldn’t otherwise have received.
2. Genuine Redundancy Payment – Tax-Free Portion
Tax-free limit calculation
The tax-free limit for a genuine redundancy payment is based on the employee’s years of service. For the 2025–26 financial year, the limit is:
- A base amount of $13,100, plus
- An additional $6,552 per complete year of service.
Example: An employee with 10 completed years of service has a tax-free limit of $13,100 + (10 × $6,552) = $78,620.
Annual adjustment
The ATO revises these figures each year, with updates taking effect on 1 July. The new indexed amounts are generally available each February. Employers should confirm the current rates at ato.gov.au to ensure compliance.
Exceeding the tax-free limit
If the redundancy payment exceeds the tax-free threshold, the surplus is classified as an excluded ETP (code “R”), while only the amount within the limit is tax-free.
3. Eligibility Based on Pension Age
Age at time of redundancy
To qualify for the tax-free component of a genuine redundancy, the employee must be below pension age on the date of dismissal. For most people born on or after 1 January 1957, the current pension age is 67.
- Under pension age: The employee is eligible for the tax-free concession reported as Lump Sum D.
- At or above pension age: The employee is not eligible for the tax-free component. Amounts that would otherwise have been included in Lump Sum D are instead reported as an excluded ETP (code “R”).
Note: The age limit was updated in October 2019 from a fixed age of 65 to the employee’s pension age. If you have employees approaching retirement age, it’s worth confirming their eligibility before processing a redundancy payment.
Key takeaways
- Only payments received solely because of the redundancy can go into Lump Sum D.
- Pay in lieu of notice can be included in Lump Sum D only if the employee would likely have worked the notice period on resignation.
- The genuine redundancy tax-free limit is recalculated annually — for 2025–26, it’s $13,100 base plus $6,552 per completed year of service.
- Eligibility for Lump Sum D depends on the employee’s age: the tax-free concession applies only to employees who are below pension age (currently 67 for most people) at the date of dismissal.
For further guidance, refer to the ATO’s genuine redundancy Tax Ruling TR 2009/2, which outlines these requirements in detail. Employers should review these guidelines carefully to ensure compliance with ATO standards on redundancy payments.
Thinking about outsourcing your payroll?
Redundancy calculations are one of the more complex areas of Australian payroll — get them wrong and both the employee and the ATO will notice. At Alltech, we manage payroll for businesses across Australia, including the end-to-end processing of termination and redundancy payments. Get in touch to find out how outsourced payroll works and whether it’s right for your business.
Contact us at alltechpayroll.com.au