Updated for the 2026–27 financial year
If you have received a lump sum payment from your employer, super fund, or Centrelink, you are probably wondering: how much tax will I actually pay?
The short answer is that it depends on the type of payment. In Australia, different lump sum payments are taxed in very different ways. Some receive concessional rates. Others may be partially or entirely tax-free. And some could push you into a higher tax bracket if you are not careful.
This guide breaks down exactly how each type of lump sum is taxed in 2025-26 and 2026-27, with worked examples and a calculator to estimate your tax.
In this article:
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What Is a Lump Sum Payment?
A lump sum payment is a one-off amount paid to you outside of your regular income. Unlike your normal salary or wages which are paid regularly, lump sums are typically triggered by specific events such as leaving a job, accessing super, receiving back pay, or getting a government benefit top-up.
The main types of lump sum payments in Australia are:
- Employment-related lump sums including unused leave payouts, redundancy payments, Employment Termination Payments (ETPs)
- Superannuation withdrawals including lump sums from your super fund, including TPD payouts
- Back payments such as wages owed from previous financial years
- Centrelink payments such as Family Tax Benefit top-ups, compensation payments
Each type is taxed differently by the ATO, which is why it is essential to understand what kind of payment you have received.
Understanding Lump Sum A, B, D and E
When you look at your income statement (previously called a payment summary), you might see amounts labelled as “Lump Sum A”, “Lump Sum D”, or “Lump Sum E”. These codes tell the ATO, and you, how the payment should be taxed. You can find more detail on the ATO’s leaving your job page.
What is Lump Sum A?
Lump Sum A covers unused annual leave and long service leave payments when you leave a job. These amounts are taxed at concessional rates (usually capped at 32%) rather than being added to your regular income.
Lump Sum A includes:
- Unused annual leave payments
- Annual leave loading paid as a lump sum
- Long service leave payments (for leave accrued after 15 August 1978)
What is Lump Sum B?
Lump Sum B was used for long service leave accrued before 16 August 1978. It is rarely seen today as most employees’ LSL has accrued after this date. If it applies to you, only 5% of this amount is taxable.
What is Lump Sum D?
Lump Sum D is the tax-free portion of a genuine redundancy or early retirement scheme payment. This amount does not count toward your taxable income at all.
The tax-free limit for genuine redundancy is:
$13,100 (base amount) + $6,552 × completed years of service for 2025-26, or $13,598 + $6,801 × completed years of service for payments made from 1 July 2026
What is Lump Sum E?
Lump Sum E covers back payments of salary or wages that relate to earlier financial years. The ATO allows special tax treatment to prevent you being unfairly pushed into a higher tax bracket.
To qualify for Lump Sum E treatment, the back payment must:
- Relate to one or more earlier income years
- Be at least $1,200 in total
Employment-Related Lump Sums
Unused Annual Leave and Long Service Leave
When you leave a job, whether through resignation, redundancy, or retirement, you are entitled to be paid out any unused leave. These payments are taxed separately from your regular salary.
Annual leave accrued after 17 August 1993 is taxed at a maximum rate of 32% (including Medicare levy). If your marginal rate is lower than 32%, you will pay tax at your marginal rate instead.
Long service leave tax depends on when it was accrued:
- Before 16 August 1978: only 5% is taxable (rare today)
- 16 August 1978 to 17 August 1993: taxed at 32% (or your marginal rate if lower)
- After 17 August 1993: taxed at your marginal rate
These payments appear as Lump Sum A on your income statement.
Genuine Redundancy Payments
If you are made genuinely redundant, meaning your job no longer exists and your employer has decided to terminate your position, part of your payment may be completely tax-free. See the ATO’s genuine redundancy page for full details.
A redundancy is genuine when:
- Your employer has made a decision that your job no longer exists
- Your employment is terminated as a result
- You are under the age pension age at the time of dismissal
A redundancy is not genuine if you:
- Resign voluntarily
- Reach normal retirement age
- Are dismissed for disciplinary reasons or poor performance
- Have your contract terminated (not the position itself)
Tax-Free Limits for Genuine Redundancy (2026-27 and Earlier Years)
| Income Year | Base Amount | Per Year of Service |
|---|---|---|
| 2026-27 | $13,598 | $6,801 |
| 2025-26 | $13,100 | $6,552 |
| 2024-25 | $12,524 | $6,264 |
| 2023-24 | $11,985 | $5,994 |
Worked Example: $60,000 Redundancy After 8 Years (2025-26 limits)
Scenario: Sarah is made redundant after 8 complete years of service. She receives a $60,000 redundancy payment.
Tax-free limit: $13,100 + ($6,552 × 8) = $13,100 + $52,416 = $65,516
Result: Sarah’s entire $60,000 redundancy payment is tax-free because it is under her $65,516 limit. This amount will be reported as Lump Sum D on her income statement. For a redundancy paid from 1 July 2026 her limit is $13,598 + ($6,801 × 8) = $68,006, so the payment is still tax-free.
Worked Example: $120,000 Redundancy After 10 Years (2025-26 limits)
Scenario: Michael receives a $120,000 redundancy payment after 10 complete years of service. He is 52 years old.
Tax-free limit: $13,100 + ($6,552 × 10) = $13,100 + $65,520 = $78,620
Tax-free portion: $78,620 (reported as Lump Sum D)
Taxable portion: $120,000 – $78,620 = $41,380 (treated as an ETP)
The $41,380 above the limit becomes an Employment Termination Payment. Since Michael is under his preservation age, it will be taxed at 32% (up to the ETP cap), resulting in approximately $13,242 in tax on this portion. For a redundancy paid from 1 July 2026 his limit is $13,598 + ($6,801 × 10) = $81,608, leaving $38,392 taxable and about $12,285 in tax.
Employment Termination Payments (ETPs)
An ETP is a payment you receive because your employment has ended. Not all termination payments are ETPs. Unused leave and the tax-free portion of redundancy are treated separately.
ETPs include:
- Golden handshakes and gratuities
- Payments in lieu of notice
- The taxable portion of a redundancy payment (above the tax-free limit)
- Ex gratia payments
- Compensation for loss of job
ETPs do NOT include:
- Unused annual leave or long service leave (these are Lump Sum A)
- The tax-free portion of genuine redundancy (Lump Sum D)
- Super benefits
- Payments for personal injury
ETP Tax Rates (2025-26 and 2026-27)
The tax rate on your ETP depends on your age and whether you have reached your preservation age.
| Your Age | Tax Rate (up to ETP cap) | Above ETP Cap |
|---|---|---|
| Under preservation age | 32% (including Medicare) | Marginal tax rate |
| Preservation age to 59 | 17% (including Medicare) | Marginal tax rate |
| 60 and over | 17% (including Medicare) | Marginal tax rate |
The ETP cap is $260,000 for 2025-26 and $270,000 for 2026-27. Any amount above this cap is taxed at your marginal rate (up to 47%). See the ATO’s ETP thresholds page for historical caps.
What is Your Preservation Age?
Your preservation age, the earliest age you can normally access your super, affects your ETP tax rate:
| Date of Birth | Preservation Age |
|---|---|
| Before 1 July 1960 | 55 |
| 1 July 1960 – 30 June 1961 | 56 |
| 1 July 1961 – 30 June 1962 | 57 |
| 1 July 1962 – 30 June 1963 | 58 |
| 1 July 1963 – 30 June 1964 | 59 |
| From 1 July 1964 | 60 |
Superannuation Lump Sums
Withdrawing a lump sum from your super has different tax implications depending on your age, the components of your super, and the reason for withdrawal. For a general overview, see Moneysmart’s tax and super guide.
Understanding Tax-Free and Taxable Components
Your super balance is made up of two components:
- Tax-free component consists of contributions made from after-tax income (non-concessional contributions) plus any amounts you contributed before 1 July 1983. This is always tax-free when withdrawn.
- Taxable component consists of employer contributions, salary sacrifice, and investment earnings. Tax depends on your age when you withdraw.
Check your super statement or contact your fund to find out your tax-free and taxable portions.
Super Lump Sum Tax Rates (2025-26)
| Your Age | Tax-Free Component | Taxable Component |
|---|---|---|
| 60 and over | Tax-free | Tax-free (from taxed fund) |
| Preservation age to 59 | Tax-free | First $260,000 at 17%, then marginal rate |
| Under preservation age | Tax-free | 22% (including Medicare) |
The low rate cap for 2025-26 is $260,000. This is the maximum amount of the taxable component you can receive at the concessional 17% rate if you are between preservation age and 59. At the time of this update the ATO had not published the 2026-27 low rate cap, so check the current figure before relying on it for a withdrawal made after 30 June 2026.
TPD (Total and Permanent Disability) Payouts
If you receive a TPD insurance payout through your super fund, special tax rules apply.
The key benefit is the tax-free uplift, where a portion of your taxable component is reclassified as tax-free based on the number of days from your disability to your retirement age. This can significantly reduce your tax.
The tax-free uplift formula:
Tax-free amount = Taxable component × (Days to retirement ÷ Total service days)
For example, if you are 45 and your retirement age is 65, you have 20 years (7,300 days) until retirement. If you have worked for 20 years, roughly half your taxable component would be reclassified as tax-free.
Terminal illness: If you have a terminal medical condition certified by two doctors, your super lump sum is completely tax-free regardless of your age.
Worked Example: Super Withdrawal at Age 58
Scenario: David, aged 58 (preservation age 57), withdraws $150,000 from his super. His statement shows $30,000 is the tax-free component and $120,000 is taxable.
Tax calculation:
- Tax-free component: $30,000, no tax
- Taxable component: $120,000, taxed at 17% = $20,400
Total tax: $20,400
Net withdrawal: $150,000 – $20,400 = $129,600
If David had waited until age 60, the entire $150,000 would have been tax-free.
Back Payments and Lump Sum E
Sometimes you receive a lump sum because you were underpaid in previous years, perhaps due to a pay dispute, award adjustment, or employer error. These payments are reported as Lump Sum E on your income statement. The ATO’s lump sum in arrears page explains how this works in detail.
Without special treatment, a large back payment could push you into a higher tax bracket in the year you receive it. The ATO allows you to spread the tax impact across the years the income relates to, potentially saving you significant tax.
How Lump Sum E Tax Works
To qualify for the tax offset, your back payment must:
- Relate to one or more earlier income years
- Total at least $1,200
The ATO uses a formula to calculate a tax offset that effectively taxes the payment as if you had received it in the years it was earned. This can result in substantial savings.
The 10% Threshold Test
To claim the full benefit, your lump sum payment in arrears must be at least 10% of your taxable income for the year you receive it. If it is less than 10%, you may still receive some benefit, but the calculation becomes more complex.
Worked Example: $15,000 Back Pay
Scenario: Emma receives $15,000 in back pay relating to underpayments from the previous 3 financial years ($5,000 per year). Her current salary is $90,000.
Without Lump Sum E treatment: The $15,000 would be added to her $90,000 income, pushing her total to $105,000. At her marginal rate of 30% plus the 2% Medicare levy, she would pay approximately $4,800 in tax on the back pay.
With Lump Sum E treatment: The ATO calculates tax as if she received $5,000 extra in each of the three previous years. Because this keeps her in lower tax brackets in those years, her effective tax is reduced. She might pay only $3,500, a saving of $1,300.
Your employer should report the payment correctly as Lump Sum E. The ATO will automatically calculate the offset when you lodge your tax return.
Centrelink Lump Sums
Centrelink may pay you lump sums for various reasons, including:
- Family Tax Benefit (FTB) top-ups after reconciliation
- Back payments of income support
- Crisis or emergency payments
- Compensation payments
Tax Treatment of Centrelink Lump Sums
Most family assistance payments are not taxable, including:
- Family Tax Benefit Part A and Part B
- Child Care Subsidy
- Parental Leave Pay (though this is taxable income, it is paid gross)
Some Centrelink payments are taxable, including:
- JobSeeker Payment
- Age Pension
- Disability Support Pension (if under age pension age)
- Parenting Payment
If you are receiving income support, any lump sum you receive from other sources (like redundancy or super) may affect your Centrelink entitlements. Always report lump sum payments to Centrelink within 14 days.
How to Reduce Tax on Lump Sum Payments
With proper planning, you may be able to legitimately reduce the tax on your lump sum payment. Here are strategies worth considering.
1. Time Your Redundancy Strategically
If you have some flexibility on when you leave, consider the timing:
- End of financial year: Leaving in late June means unused leave is paid in the current financial year, while your ETP might be deferred to July (a new tax year with fresh thresholds)
- Lower income year: If you expect to earn less next year, deferring payments can reduce your marginal rate
2. Roll Excess ETP Into Super
If your ETP exceeds the concessional tax thresholds, you may be able to roll part of it into your super fund instead of taking it as cash. This can defer tax until you withdraw from super, potentially when you are over 60 and it is tax-free.
Note: Not all ETPs can be rolled over, and contribution caps apply. Speak with a financial adviser before making this decision.
3. Wait Until 60 for Super Withdrawals
If you are in your late 50s and considering accessing super, waiting until you turn 60 can save significant tax. Super withdrawals from a taxed fund are completely tax-free from age 60.
4. Salary Sacrifice Before Redundancy
If you know redundancy is coming, consider salary sacrificing extra into super beforehand. This reduces your taxable income and builds your super balance, which you can access tax-free from age 60.
5. Maximise Your Years of Service
Since the tax-free redundancy limit increases by $6,552 for each completed year of service ($6,801 for payments made from 1 July 2026), staying an extra few months to complete another year could increase your tax-free amount by over $6,500.
6. Consider a Transition to Retirement Strategy
If you are over preservation age, a transition to retirement (TTR) strategy allows you to access some super while still working. This can provide tax-effective income in the lead-up to full retirement.
How to Report Lump Sums on Your Tax Return
In most cases, your employer or super fund will report lump sum payments directly to the ATO through Single Touch Payroll (STP). However, you should always check your income statement or payment summary to ensure accuracy.
Where to Find Lump Sum Information
Your income statement (available through myGov) will show lump sums under specific labels:
- Lump Sum A for unused leave payments
- Lump Sum B for pre-1978 long service leave (rare)
- Lump Sum D for tax-free genuine redundancy
- Lump Sum E for back payments relating to earlier years
- ETP for Employment Termination Payments (separate statement)
ETP Payment Summaries
For ETPs, your employer must provide a separate ETP payment summary within 14 days of making the payment. This shows the taxable and tax-free components, the type of ETP, and tax withheld.
Super Lump Sum Statements
Your super fund will provide a lump sum payment statement showing the tax-free and taxable components, and any tax withheld. Keep this for your records.
Frequently Asked Questions
What is the difference between Lump Sum A and Lump Sum E?
Lump Sum A is for unused annual leave and long service leave payments when you leave a job. These are taxed at concessional rates (capped at 32%).
Lump Sum E is for back payments of salary or wages that relate to earlier financial years. The ATO allows a tax offset to spread the tax impact over the years the income was earned, preventing you from being pushed into a higher bracket.
How much tax will I pay on a $50,000 redundancy?
It depends on your years of service. For 2025-26, the tax-free limit is $13,100 plus $6,552 per completed year of service. For payments made from 1 July 2026 it is $13,598 plus $6,801.
If you have worked 6 years, your tax-free limit is $13,100 + (6 × $6,552) = $52,412. Your entire $50,000 would be tax-free.
If you have only worked 3 years, your tax-free limit is $13,100 + (3 × $6,552) = $32,756. The remaining $17,244 would be taxed as an ETP at either 17% or 32% depending on your age.
Is Lump Sum D taxable?
No. Lump Sum D is the tax-free portion of a genuine redundancy or early retirement scheme payment. It is not included in your taxable income.
Do you get taxed more on lump sum payments?
Not necessarily. Many lump sum payments actually receive concessional tax treatment:
- Genuine redundancy payments have a tax-free component
- Unused leave is capped at 32% rather than your marginal rate
- Super withdrawals over age 60 are tax-free
- ETPs are taxed at concessional rates up to the cap
However, if your lump sum pushes your total income into a higher tax bracket, the amount above that threshold will be taxed at the higher rate.
How to avoid lump sum tax?
You cannot avoid tax entirely on most lump sums, but you can minimise it by:
- Maximising your years of service before redundancy
- Waiting until age 60 for super withdrawals
- Rolling eligible ETPs into super
- Timing payments to fall in lower-income years
- Ensuring back payments are correctly reported as Lump Sum E
What is the 6% rule for lump sum?
There is not a specific “6% rule” for lump sums in Australian tax law. You may be thinking of the 10% threshold test for Lump Sum E (back payments), where the payment must be at least 10% of your taxable income to qualify for the full tax offset.
Is it better to take a lump sum payout or monthly pension?
This depends on your personal circumstances, including your age, health, financial needs, and investment knowledge.
Lump sum advantages:
- Full control over your money
- Can invest or spend as you choose
- Potential tax-free if over 60
Income stream (pension) advantages:
- Regular guaranteed income
- Potential tax benefits on earnings
- Less temptation to overspend
Many retirees use a combination of both. We recommend speaking with an adviser to determine what is best for your situation.
Disclaimer: This article provides general information only and is current as at September 2026. It does not constitute financial or tax advice. Tax rates and thresholds are based on ATO information for the 2025-26 and 2026-27 financial years and may change. Your personal circumstances may affect how these rules apply to you. Please consult a registered tax agent for advice specific to your situation.
About The Author: Artur Osadchiy
Artur is a Certified Practising Accountant with over 30 years’ experience working as a trusted advisor to 600+ clients across Australia. Based in Melbourne, he started Tax Window with his wife Marina in 2009 and leads the firm’s tax and accounting team. In his free time, Artur enjoys watching the AFL (go Kangas!) and spending time with family.
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