When being made redundant as an employee, or as an employer making someone redundant, it is important to understand the different types of redundancy, the payments that are included and not included in a redundancy payment, as well as the tax treatment of those payments. Perhaps, most notably, certain redundancy payments are tax free but only up to a certain limit. We can help you to know your rights and obligations when it comes to tax on redundancy payments.
What is a Genuine Redundancy Payment?
Before we delve into the tax applications and implications when it comes to redundancy payments, it is important to understand what a genuine redundancy is. Genuine redundancy payment is a payment made to you as an employee if you’re dismissed because the job you were doing has been abolished. This means your employer has made a decision that your job no longer exists, and your employment is to be terminated.
Understanding Tax on Genuine Redundancy Payments
When it comes to paying (or withholding) tax on a genuine redundancy payment, is it typically applied as follows:
- tax-free up to a limit based on your years of service
- concessionally taxed as an employment termination payment (ETP) above your tax-free limit
- taxed at your usual marginal tax rate for any amount above certain caps.
The tax-free amount is not part of the employee’s ETP. It’s reported as a lump sum in the employee’s income statement or PAYG payment summary – individual non-business.
Any amount over the tax-free limit is part of the employee’s ETP.
On 29 October 2019, changes to the age employees can access concessional tax treatment for genuine redundancy and early retirement scheme payments became law. The age-based limit of 65 years old has changed to the age pension age (66 years old).
This change applies to payments made to employees who are dismissed or retire on or after 1 July 2019.
Amounts Included and Excluded from a Redundancy Payment
Depending on your employment conditions, a genuine redundancy payment may include:
- payment in lieu of notice
- severance payment of a number of weeks’ pay for each year of service
- a gratuity or ‘golden handshake’.
The following payments are not included in a genuine redundancy payment:
- salary, wages or allowances owing to you for work done or leave already taken for work completed
- lump sum payments of unused annual leave or leave loading paid on termination of employment
- lump sum payments of unused long service leave paid on termination of employment under a formal arrangement
- payments made in lieu of superannuation benefits.
Any payments that meet the conditions of a genuine redundancy are tax free up to a limit based on your years of service with your employer.
The tax-free limit is a flat dollar amount plus an amount for each year of completed service in your period of employment with your employer. Indexation changes the tax-free limit on 1 July each year.
Non-Genuine Redundancy Payments
It is important to note, that not all redundancies are treated the same. A non-genuine redundancy can still attract some tax concessions, but these are applied in the exact same way as for genuine redundancies.
A non-genuine redundancy payment occurs when you:
- are dismissed because you’ve reached normal retirement age
- are of pension age or older on the day of dismissal
- leave voluntarily
- have your contract terminated
- are dismissed for disciplinary or inefficiency reasons.
A payment for a non-genuine redundancy payment is taxed as part of your ETP. What does this mean? Basically, it will generally be taxed at a lower rate than your normal income, provided the payment doesn’t exceed certain caps.
If you would like help with respect to tax on genuine redundancy payments, please contact one of our experienced accountants by submitting an online enquiry form, calling us on 1300 QUINNS or alternatively, +61 2 9223 9166 to arrange a teleconference or appointment.