Being made redundant can be one of the most stressful events in a person’s life. A large payout figure may look good at first glance but the effects of taxation can have a significant impact on the final amount received – adding even more stress.
The first action is to always seek financial advice to ensure you get the most of a redundancy payment.
Components of a payment
There are several components that can make up a redundancy payment. These can include:
- payment in lieu of notice;
- severance payment (a “golden handshake”);
- unused sick leave, annual leave, or rostered days off.
However, redundancy components vary from employer to employer and from one industry to another. To confirm what entitlements may be available in the event of redundancy it’s important to check your employment contract or refer to your industrial award.
Different tax treatment
For people under age 65, a redundancy payment will have a tax-free component, which includes a base amount plus an extra amount for each completed year of service. Any amount of redundancy payment received that is over this threshold is taxed as an “employment termination payment” (ETP). If you worked for your employer prior to 1983, the amount of the redundancy payment relating to this time will also be tax-free.
For employees aged 65 and over who receive a redundancy payment, the entire amount is taxed as an ETP.
Rolling into superannuation
The ETP component of the redundancy payment must be paid as a lump sum, unless transitional rules are met that allow the payment to be rolled over to a superannuation fund.
Transitional arrangements apply for those made redundant up until 30 June 2012. These arrangements allow employees a choice to roll over a redundancy ETP to superannuation, instead of receiving it simply as a cash lump sum. When this option is available it can save a significant amount of tax.
Taxing a redundancy ETP
The ETP cap is indexed every financial year, and is set at $185,000 in the 2015/16 financial year.
If employees are 55 or older in the financial year they are made redundant, all amounts up to the ETP cap are taxed at 17%. Employees under 55 will be taxed at 32% up to the ETP cap.
For all employees, the balance in excess of the ETP cap is taxed at 49% (including the 2% Temporary Budget Repair Levy).
As you can see, the tax treatment of a redundancy payment can be quite complex. If you have received or are about to receive a redundancy payment, speak to your financial adviser on (07) 3040 4840 to ensure it is managed correctly and you don’t get any nasty surprises at tax time.
Note: all tax rates quoted include the Medicare levy of 2%
The advice on this site may not be suitable to you because it contains general information that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Please also refer to our general advice warning under contact us tab on our website. The article is based on information available at the time of writing only and therefore care should be taken as to the accuracy of the content.
Image courtesy of [Pixomar] at FreeDigitalPhotos.net