The specific provisions regarding genuine redundancy payments (GRPs) provide that an employee must be dismissed before the day they turn 65 for the payment to qualify as a GRP. If retirement age under the employment contract is a lesser age, then dismissal must occur prior to that age. Therefore, even though your employee is genuinely being made redundant, the payment cannot qualify as a GRP that is able to access the tax-free threshold.
You are correct that their redundancy payment will be taxed as an ETP. However, where the only reason the payment does not qualify as a genuine redundancy payment is due to the employee reaching retirement age, the ETP taxation provisions confirm that only the ETP cap needs to be considered. For further information, refer to the ‘Which Cap to Apply’ section of QC 26218 published by the ATO.
Therefore, the payment will be taxed as an ETP with amounts up to the ETP cap (which for the 2019 income year is $205,000) taxed concessionally. Please note that the concessional tax rate applicable should be 17% because the employee has reached preservation age. You can find the current withholding rates for ETPs in QC 55466. Any part of the payment in excess of the ETP cap will be taxable at top marginal rates.