If you have been made redundant, it is important to understand the financial issues involved, your entitlements, and how to make the most of your redundancy payment with the help of your adviser.
Components of a redundancy payment
Once made redundant, you may be entitled to receive certain tax concessions that would not normally be available if you were leaving on other grounds.
Generally a redundancy payment is made up of a few different components, with each component receiving its own tax treatment. The table below shows the main components that generally make up a redundancy payout and the tax treatment of each.
|Genuine redundancy payment (up to a prescribed amount)||Tax-free|
|Remaining redundancy payment (above prescribed amount)||Taxed|
|Unused annual leave and long service leave||Taxed|
Genuine redundancy payments
For a payment to be considered a genuine redundancy payment for tax purposes, it must meet the following criteria:
- recipient is under 65 years of age
- the duties performed are no longer required
- no arrangement for future employment with the company can be made
- the amount paid must not exceed an amount for a dismissal that is reasonable on an arm’s length basis
A genuine redundancy payment does not include any amount paid in relation to unused annual or long service leave entitlements. However, it will include any payments in relation to unused sick leave or unused rostered days off.
Depending on the amount of your genuine redundancy payment, it may be made up of either (or often both) a tax-free amount and a taxable amount. The taxable amount is generally any money in excess of the tax-free redundancy amount of the genuine redundancy payment. This excess is known as an employment termination payment (ETP).
Unpaid salary or wages
This is the portion of exit payments that represents your normal salary or wages. It is taxable as ordinary income without any special treatment.
Unused annual leave and long service leave payments
You may be entitled to unused annual and/or long service leave payments. These will be paid out as a lump sum when you leave your employer. These amounts are taxable as lump sum leave payments and do not qualify for treatment as a tax free redundancy payment nor as an employment termination payment (ETP).
If you have been made redundant, concessional rates of tax apply, depending on when the leave was accrued and your marginal tax rate. Your employer should withhold tax when these amounts are paid to you.
Tax-free redundancy amount
The tax-free redundancy amount is calculated using a formula set in legislation. This consists of a base amount and a further amount, which is multiplied by the number of completed years you have worked for your employer. The base amount and the further amount are indexed each year in line with average weekly ordinary time earnings (AWOTE). This amount is not an ETP and is simply taken tax-free.
Employment Termination Payment (ETP)
Any payments in excess of the tax-free redundancy amount will be treated as an ETP and will be taxed accordingly. If you had an employment service period which commenced on or before
30 June 1983, then the fraction of your ETP related to that service period will be treated as the tax-free component of the ETP. The residual amount is the taxable component of the ETP.
Strict conditions apply to what can and can’t be considered an ETP.
If you have been made redundant, you may wish to apply for a Centrelink benefit such as Newstart Allowance. In order to access social security benefits – first you will need to prove your eligibility through the assets and income tests. You may then be required to serve one or more waiting periods before receiving your first payment.
When you leave your job you may satisfy a condition of release allowing access to some or all of your superannuation. Some common conditions of release include permanently retiring after preservation age (between 55 and 60 depending on your date of birth), or stopping work after age 60. All withdrawals from super are tax-free once you reach 60 (this applies to taxed funds only), but some tax may apply if you withdraw your super while under age 60. If you are able to access your super, you should consider the various tax and social security implications before you decide whether or not to cash it out.
General Advice Warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.