Redundancy can be stressful as you face the emotional and financial insecurities of losing your job. Having some understanding of the different tax implications of your redundancy payment will help to make the most of payout. When we think of redundancy, we usually think of it as losing a job. However, the ATO is specific in its definition of the term because not all redundancy payments are taxed in the same way.
What is redundancy according to the ATO?
The ATO classifies redundancy as being either genuine or non-genuine. Only genuine redundancy payments are exempt from tax but only up to a certain amount. This limit is determined by the number of years an employee has worked for the employer. For a redundancy to be genuine, it needs to satisfy two conditions:
- The position must cease to exist because it’s no longer needed in the company.
- The employee being made redundant is under the retirement age.
Redundancy can happen in any business or company. Reasons can include:
- The slowdown in business and overstaffing issues.
- Relocation a business to somewhere far.
- The restructuring of an organisation.
- The closing down of business.
- The implementation of automation technology that replaces the need for human labour.
The ATO classifies the following scenarios as non-genuine redundancies:
- is dismissed because they’ve reached retirement age.
- leave at their own will or choose to resign
- has their contract terminated by their employer, or
- is dismissed due for wrongdoing or inefficiency reasons.
If you’re made redundant, you will generally be compensated with a lump sum in the form of an employment termination payment (ETP) or a redundancy payment. This payment can be a severance package, early retirement payment, or payment made as a substitute for providing notice of termination.
How are redundancy payments taxed?
Payouts made to an employee as a redundancy payment or an employment termination payment has little consequence for the employer. However, the tax implication between these two payments will be different for the employee. This is because only genuine redundancy payments are exempt from tax, up to a certain limit. Amounts above the limit will get taxed at a concessional rate.
The tax-free limit is determined by the following formula:
Base amount + (service amount x number of full years of service)
For 2018-2019, the base amount is $10,399 while the service amount is $5200. This amount is subject to change at the start of each new financial year.
The remaining amount that is above this tax-free limit will be taxed as an ETP. Although ETPs are not tax-free, it does receive a tax concession up to a certain limit. For non-genuine redundancies, the payments are also taxed as an ETP.
Be aware that the ATO does not see the following as redundancy payments and therefore will be taxed at your normal rates:
- Back pay for work that you’ve already done.
- Long service leave and annual leave payouts.
- Payments made in place of super.
You may be tempted to spend your payout on unnecessary things if you are not careful. Just remember that you may need your redundancy payment to get you and your family through an unstable period. It’s always wise to work out a budget and plan out your family expenses, at least until you have landed another job. Keep in mind that you won’t qualify for Centrelink benefits for the period you have been covered for by your redundancy payment. In addition, your partner’s income can also affect your eligibility for Centrelink benefits.
Receiving a redundancy payment will affect your tax return for the financial year. Individual circumstances such as your age and size of redundancy payment will also have an influence on what you can do with the money. If you are unsure about how to plan out your budget, it’s wise to get professional assistance.
Contact Moiler to ensure that your redundancy payments and tax are reported accurately and let the team help you make the most effective use of your redundancy payment.
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This document has been prepared by Moiler Partners, an Authorised Representative of Count Financial Limited ABN 19 001 974 625; AFSL 227232 (“Count”) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124 and is for general information only. The presentation has been prepared without taking into account your personal objectives, financial situation or needs. You should assess whether the information is appropriate for your needs and consider talking to a Count Authorised Representative before making any investment decision. The relevant PDS should be considered before making a decision about any financial product. The information is provided as an information service only and does not constitute financial product advice and should not be relied upon as financial product advice. 27 August 2018.