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.
If you have been made redundant, you may be entitled to receive certain tax concessions (1) 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:
Genuine redundancy payments (Tax-free)
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 (2).
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 (Taxed)
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 (Taxed)
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 taxfree 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.
Getting help from your adviser
Making the right decisions now about how you deal with your redundancy can help you maximise your payment, minimise the amount of tax you pay and ensure you can access any social security benefits you might be entitled to. The choices you make will depend on your age, lifestyle, the size of your payment, your debt levels and your future job prospects. This is where Rowland Advisory can guide you through the range of options available and help you select the best choice for your situation.
Things to consider:
- Take time to think through all your work and lifestyle options before making any immediate decisions.
- Get advice from your financial adviser before you finish work so they can help optimise your benefits and payout structure.
- Seek out experts in career transition who can provide specialist tools and resources to get you back on track and working sooner.
1. These tax concessions also apply to ‘early retirement schemes’.
2. An arm’s length transaction is one carried out by two parties with no connection between them, resulting in fair market value.
Contact Rowland Financial Advisory for more information.