Approved early retirement schemes (s.83-180): tax treatment for late-career employees facing employer restructuring offers

For Australian employees in their late 50s and early 60s offered a package under their employer's approved early retirement scheme (ERS) — a formal workforce-restructuring program approved by the Commissioner of Taxation under section 83-180 of the Income Tax Assessment Act 1997 — the tax treatment is materially better than for ordinary employment termination payments. The ERS pathway accesses the same tax-free amount formula in section 83-170 that applies to genuine redundancy under section 83-175: a base amount plus a per-year-of-service component (FY25-26 indexed amounts published annually on the ATO's redundancy payments page), with the excess taxed as an employment termination payment (ETP) at concessional rates within the ETP cap of $260,000 for FY25-26. For long-service employees with 15–25 years of tenure, the tax-free amount alone can exceed $100,000, with the excess taxed at a 17% concessional rate (15% plus 2% Medicare levy) for over-preservation-age recipients rather than the marginal rate that would apply to ordinary salary. For late-career employees facing such offers, understanding the framework — and the specific differences between ERS and genuine redundancy — is essential to capturing the tax benefit and integrating the lump sum into retirement planning.

The distinction between ERS and genuine redundancy is the first technical point that often confuses employees and HR teams alike. Genuine redundancy under s.83-175 applies where the employee's specific position is no longer required by the employer — the role is being abolished, the function is being outsourced, the team is being dissolved. The employee's separation is involuntary in the sense that the position has gone. Approved ERS under s.83-180 applies where the employer is undertaking a broader workforce restructure — reducing headcount, transitioning to a new operating model, relocating, integrating after a merger — and offers a class of employees the option to leave under prescribed terms. The ERS pathway allows broader use than genuine redundancy: a company can offer voluntary departure packages to employees in an affected division, even where each individual position isn't strictly being made redundant. Both pathways access the same tax-free amount formula and the same ETP treatment for excess; they differ on the qualification mechanics rather than the tax outcome.

The tax-free amount formula under s.83-170 is the same for both pathways. The formula is base amount + (per-year amount × years of completed service). Both components are indexed annually to AWOTE (Average Weekly Ordinary Time Earnings), with the ATO publishing each year's indexed amounts on its redundancy payments page. For an indicative FY25-26 calculation, taking the base around $13,100 and the per-year amount around $6,552 (the ATO's published figure for the year should be confirmed at the time of advice), a 25-year-service employee would have a tax-free amount in the order of $13,100 + (25 × $6,552) ≈ $176,900. For a 10-year-service employee, approximately $13,100 + (10 × $6,552) ≈ $78,620. Years of service means continuous employment with the employer (and connected entities under group employment); part-years count proportionally based on completed months. The tax-free portion is treated as non-assessable, non-exempt income — it doesn't appear in taxable income at all, doesn't affect the rate at which other income is taxed, and doesn't contribute to Medicare levy or other rate-dependent calculations. The benefit is substantial — a $176,900 tax-free amount that would otherwise be taxed at 39% (37% + 2% Medicare under the FY25-26 stage-3 brackets) saves approximately $69,000 in tax.

The excess above the tax-free amount is treated as an ETP. ETPs receive concessional taxation up to the ETP cap of $260,000 for FY25-26. Within the ETP cap, the rates for recipients at or over preservation age (60 for everyone born after 30 June 1964) are 17% all-in (15% concessional rate plus 2% Medicare levy). For under-preservation-age recipients, the rate is 32% (30% plus Medicare). Above the ETP cap, the top marginal rate of 47% (45% plus Medicare) applies. For a 60-year-old employee receiving a $400,000 package with $176,900 tax-free, the excess is $223,100 — within the ETP cap, taxed at 17%, producing a tax bill of approximately $37,900. Compare with ordinary marginal-rate treatment of the same $223,100 (top portion in the 37% bracket and possibly some in the 45% bracket): tax of roughly $85,000 to $100,000. The ERS structure saves $50,000–$60,000 in tax on the excess alone, on top of the tax-free amount benefit.

The ATO approval requirement is the procedural gateway for ERS treatment. Unlike genuine redundancy (which doesn't require pre-approval), an ERS must be approved by the Commissioner of Taxation before any payments are made under the scheme. The employer applies with the scheme rules, eligibility criteria, payment formula, business rationale, and expected participant numbers. The ATO assesses whether the scheme genuinely represents a workforce restructure (rather than a disguised severance arrangement to fund individual exits) and whether the rules are appropriate. Approval is typically prospective — payments before approval don't qualify. Approval is time-bound (a defined offer window). For employees considering an ERS package, the first practical question is whether the scheme has actually been approved — an offer characterised by the employer as "early retirement" but without formal ATO approval doesn't get s.83-180 treatment, and the entire package would be ETP without the tax-free amount benefit. Requesting a copy of the ATO approval letter from the employer is essential due diligence.

The late-career employee context makes ERS particularly valuable. Long-service employees aged 55+ benefit most from the tax-free amount (because the per-year component scales with years of service) and from the concessional ETP rate (because they're at or above preservation age and taxed at 17% rather than 32%). The employer's interest in offering ERS is typically to reduce older-worker headcount voluntarily — older workers are more expensive (higher salaries, longer leave entitlements, higher overheads) and may have skill profiles less suited to new operating models. The ERS framework provides a tax-incentivised way for employees to accept exit voluntarily without litigation or industrial action. From the employee's perspective, the question is whether the package adequately compensates for the loss of remaining employment income, accumulated entitlements (long service leave, accrued bonuses), and continued superannuation contributions — and whether the lifestyle transition makes sense. The tax efficiency of the ERS pathway is part of the value proposition, but doesn't change whether the underlying decision is right for the individual.

The super contribution opportunity for the lump sum is significant. ERS recipients can typically contribute a portion or all of the after-tax payment to super using non-concessional contributions under ITAA 1997 s.292-85 (within the NCC cap and TSB threshold) or concessional contributions (within the $30,000 FY25-26 concessional cap and any carry-forward unused cap under s.291-20 from the prior five years, available where TSB at the prior 30 June was under $500,000). Late-career employees often have substantial unused concessional cap from earlier years — the five-year carry-forward can offer $90,000–$150,000 of additional room depending on the member's history. Contributing the lump sum to super captures the 15% concessional rate within super (rather than the 17% ETP rate, providing some additional saving) and positions the funds for future pension drawdown rather than personal savings. Salary sacrifice arrangements before termination can also be used — sacrificing remaining salary into super in the months before termination reduces the cash payment but increases the super balance, often more tax-efficient depending on marginal rates.

The Centrelink Income Maintenance Period (IMP) interaction is a planning consideration. Under social security law, an ERS payment is treated as if it were salary received over the period the lump sum represents at the recipient's pre-termination weekly wage. For example, an employee earning $2,000 per week receiving a $50,000 lump sum is treated as having continued income of $2,000 per week for 25 weeks — Age Pension or JobSeeker is deferred during this 25-week period. The IMP applies whether the recipient takes the cash or contributes to super — though super contribution may reduce the assessable income for IMP purposes in specific circumstances depending on Centrelink's interpretation of the contribution timing and structure. The Liquid Assets Waiting Period (LAWP) may also apply for some payments where the recipient holds substantial cash. For Age Pension claimants, the IMP can mean a substantial delay in pension start — months or years for large packages — which needs to be factored into bridge-funding plans for the period.

The practical advice work for practitioners has a specific shape. Confirm scheme approval — request copy of ATO approval letter or confirmation from employer; verify scheme is actually s.83-180 approved. Calculate tax-free amount — base + (per-year × years of service) using the FY25-26 ATO-published indexed figures for the specific employee's tenure. Plan the excess treatment — compare ETP within cap (17% for over-60), ETP above cap (47%), and super contribution options. Optimise super contribution — use carry-forward concessional room, NCC bring-forward where eligible, and CGT cap (s.292-100) where applicable. Plan timing — receipt year tax position, retirement year tax position, salary sacrifice opportunities before termination. Manage Centrelink interaction — IMP calculations, LAWP if applicable, super contribution to potentially reduce assessable income, Age Pension claim timing. Coordinate with retirement planning — when to start drawing super pension, accumulated leave timing, transition-to-retirement strategy. Document the decision — record offer details, eligibility verification, calculations, alternatives considered, acceptance rationale.

What do worked planning examples show?

These two cases show how the ERS framework plays out for typical late-career scenarios. Illustrative only — not personal advice — using FY25-26 figures (with indicative tax-free amount components subject to confirmation against ATO's published values for the year).

Case 1 — Robert, 62, 28 years service, $130,000 base salary. Employer offers ERS package: $200,000 lump sum + payout of accrued leave ($30,000) + outplacement support. On these facts, tax-free amount (using indicative FY25-26 figures): $13,100 + (28 × $6,552) ≈ $196,556. The $200,000 lump sum is mostly tax-free; excess of around $3,444 within ETP cap, taxed at 17% (Robert is over preservation age and over 60), tax of about $585. Accrued leave ($30,000) is treated separately under the unused leave-on-termination provisions, with the rate depending on the accrual period (post-1993 leave taxed at maximum 32%). Outplacement support is typically a tax-free fringe benefit. Super contribution opportunity: Robert can contribute up to $30,000 concessional plus available carry-forward room from prior years (if his TSB at 30 June was under $500,000), into super at 15% tax rate. Centrelink: at 62 not yet Age Pension age, no immediate Age Pension impact. The ERS framework saves Robert approximately $70,000 in tax on the lump sum compared with ordinary marginal-rate treatment.

Case 2 — Margaret, 67, 12 years service, $90,000 base salary. Reaches Age Pension age at termination; employer offers ERS package: $90,000 lump sum. On these facts, tax-free amount: $13,100 + (12 × $6,552) ≈ $91,724. The $90,000 lump sum is fully tax-free (within the tax-free amount). Margaret has the full $90,000 in cash. Centrelink: the lump sum triggers the IMP — at $1,730 weekly pre-termination wage, the IMP period is approximately 52 weeks, deferring Age Pension for one year. Strategy: contribute $90,000 to super as a non-concessional contribution (within the $120,000 NCC cap if Margaret's TSB allows). With the super contribution, the lump sum sits in accumulation or pension phase rather than personal cash; assessable assets for Age Pension at the end of IMP include the super balance (assessed as a financial asset under deeming once she reaches Age Pension age, which she has). Margaret bridges the IMP year using her existing savings and accumulated leave. After IMP, she claims Age Pension; the $90,000 in super is assessed in the standard way. The ERS framework gave Margaret a fully tax-free lump sum that she rolled into super for future pension funding.

For Australian employees in their late 50s and early 60s offered an approved early retirement scheme package under s.83-180, the tax treatment is materially better than for ordinary employment termination — accessing the same tax-free amount and concessional ETP rates as genuine redundancy under s.83-175. The framework requires ATO scheme approval (verify before acting), provides substantial tax-free amounts based on years of service (indexed annually under s.83-170), and treats the excess as ETP within the $260,000 cap at 17% concessional rate for over-preservation-age recipients. Late-career employees benefit most because long service produces large tax-free amounts and the concessional ETP rate captures the full value. The advice work is to verify scheme approval, calculate the tax-free amount using ATO's published indexed figures, plan the excess treatment, optimise super contributions, manage Centrelink interaction, and coordinate with retirement planning. For employees considering whether to accept an ERS offer, the tax efficiency is a real benefit — but the underlying decision (whether the package adequately compensates for lost employment income and entitlements) is the more important question.

Sources

• classic.austlii.edu.au — S83.180
• classic.austlii.edu.au — S83.175
• classic.austlii.edu.au — S83.170
• Australian Taxation Office (ATO) — Redundancy payments
• Australian Taxation Office (ATO) — Key superannuation rates and thresholds