Facing redundancy? Make the most of your payment
While redundancy was once considered an unwelcome sign of the times, the new corporate reality means it’s becoming more likely that at some stage during your career, you’ll likely go through redundancy yourself.
Getting the right advice can help you make the most from a redundancy payment as you move into a new job. And if you’re thinking of taking a break between jobs, you’ll need to structure your finances to make your money last.
But first, let’s look at the redundancy payments, what types there are and how tax might affect you.
Types of redundancy payments
There are several components to redundancy payments such as:
- payments in lieu of notice
- a ‘golden handshake’ (or severance payment), and
- unused annual leave, sick leave or unused rostered days off.
But redundancy payments vary from employer to employer and from one industry to another. To confirm what entitlements may be available to you in the event of redundancy, it’s important to check your employment contract or refer to your award.
Tax-free redundancy payments
If you’re under 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. Also, if you worked for your employer prior to 1983, the amount of the payment relating to this period will be tax-free.
The tax-free component is indexed each year. For the 2012/13 financial year, the base amount is $8,806 plus $4,404 for each completed year of service. Any payment over the tax-free component is taxed as an eligible termination payment (ETP).
If you’re 65 or over, the entire redundancy payment is taxed as an ETP.
The ETP must be paid as a lump sum, unless you meet transitional rules to allow the payment to be rolled over to a super fund.
Tax treatment of a redundancy ETP
If you’re 55 or older during the financial year you’re made redundant, all amounts up to the ETP cap are taxed at 16.5%. Employees under 55 will be taxed at 31.5% up to the ETP cap.
For all employees, the balance in excess of the ETP cap is taxed at 46.5%. All of the tax rates include a Medicare levy of 1.5%.
The ETP cap is indexed every financial year, and is set at $175,000 in the 2012/13 financial year.
Doing the math – a case study
While it wasn’t a surprise when Harry Thom was made redundant, he was certainly a little anxious. At 57, he was six years off his retirement, so wanted to make the most of his money but not have to go back to full time employment.
With eight years service with his employer, Harry was set to receive a $60,000 payment. Here is how that payment was treated.
Tax-free component = $8,806 + ($4,404 x 8) = $44,038
Taxable (ETP) component = $60,000 - $44,038 = $15,962
As the entire ETP component is under the ETP cap of $175,000 for the 2012/13 financial year, this amount is taxed at 16.5% (or $2,634).
Harry’s redundancy payment after tax was therefore $57,366.
If you are facing redundancy, or know someone who is, it pays to be aware of the taxation implications of receiving a redundancy payment. Contact us today for advice on making the most of a redundancy payment.