Being made redundant can be a traumatic event for most people particularly where it is unexpected and unplanned.
When it happens, there are probably four key issues that need to be dealt with:
- The personal stress and emotion – in short, do not panic and make rash decisions;
- Dealing with the redundancy package – there are possibly significant tax issues and concessions available that may help. But it can be complex and don’t assume your employer will get it right;
- Surviving financially until you get another job – essentially, what Centrelink benefits may be available to help out and how long will they take to cut in?
- Finding that new job or career
It can be a very stressful time …
Suddenly being without the security and familiarity of a pay packet, but with all the normal household expenses still to pay, coupled with uncertainty about any possible return to work is normally a very stressful time for most people. Under these circumstances, it is very important not to make any rash decisions. The redundancy payment may look to be a very large amount, but it is difficult to have any realistic idea of how long it needs to last you.
Sitting down with a partner to review immediate financial commitments, review and prioritize expenses, and complete a budget accordingly, is probably a very good idea. If nothing else, it should help to focus on the important issues and probably “re-base” the “normal” thinking process to the new situation thereby minimizing the chance of rash and less appropriate decisions.
What is an ETP (Employment Termination Payment)
As the name implies, an ETP is a payment made in consequence of the termination of employment where:
- The payment is received in consequence of the termination of the person’s employment, or as a result of another person’s death (spouse receives a death ETP);
- The payment is received no later than 12 months after the termination*; and
- The payment is not excluded as an ETP under the law.
*Payments made outside the 12 months period (with some exceptions), will be included in assessable income and taxed at marginal tax rates.
ETP’s can be life benefit termination payments, which includes genuine redundancy payments or death benefit termination payments. In this article, we are looking only at life benefit termination payments and in particular, genuine redundancy payments.
As ETP’s are concessionally taxed, it’s important to understand what is and what is not an ETP. Sometimes it is easier to look at what is not included as an ETP payment. The following payments are not ETP’s and therefore may have a different tax treatment, even though they may be received as a result of termination of employment:
- A superannuation benefit- lump sum or income stream;
- Unused annual leave and long service leave payments;
- The tax free portion of a genuine redundancy payment;
- Payments made more than 12 months [NS1]after termination;
- Certain CGT small business concession payments;
- Certain foreign termination payments arising out of foreign employment;
- Capital payment for or in respect of person injury;
- Amounts included in assessable income under employee share schemes;
Not all terminations will meet the redundancy criteria, for example, senior management positions that terminate on dismissal may result in “golden handshakes” or “golden parachute” payments. While these are termination payments, unless they meet the conditions of genuine redundancy, they will be subject to a different tax treatment.
All ETP’s, genuine redundancy and other termination payments, are taken to have been received by the person and cannot be rolled over to superannuation at the time of payment. Should the decision be made to contribute all or part of the payment to superannuation, it will be done as a normal contribution needing to conform to all the usual contribution tests and caps and preservation rules. It used to be the case that ETP’s could be rolled over to superannuation to save some tax but this strategy has not been available for a number of years.
Is it a genuine redundancy payment?
In order to be eligible for the maximum tax concessions, there must be a genuine redundancy. Typically, the following conditions need to be met to be classed as genuine redundancy payments:
- Your job no longer needs to be done by anyone – that is, the position is no longer required;
- The payment is more than the amount your employer would have paid you on a voluntary departure or other circumstances;
- The termination of employment is before age 65 unless an earlier retirement date applies in which case the redundancy must occur before the earlier retirement date;
- Your employer does not re-employ you or have an arrangement with another person to re-employ you;
- If you are related to the employer in some way, the payment is not more than it would have been if you were not related;
Examples of when genuine redundancy can happen would include when the business:
- introduces new technology (eg. the job can be done by a machine);
- slows down due to lower sales or production;
- closes down;
- relocates interstate or overseas;
- restructures or reorganizes because a merger or takeover happens;
Where the redundancy is not considered genuine, the termination payment will be taxed under the normal ETP rules.
Taxation of genuine redundancy payments:
The genuine redundancy payment can be made up of two parts for tax purposes – a tax free amount calculated based on the period of employment and the remainder amount, an ETP life benefit termination amount, which itself may comprise a tax free and taxable amount.
To start, a genuine redundancy payment receives a special tax treatment in that an amount paid to a certain amount is tax free. Effectively, once the tax free redundancy part of the genuine redundancy (the amount based on the years of service) is worked out, the balance is the ETP amount. On rare occasions, the ETP may include a tax free amount where there is a service period that relates to pre July 1983 service (that is obviously becoming rare) or if there is an invalidity component. In most redundancy cases however, it is common for this ETP amount to comprise only of a taxable amount.
The tax free redundancy (service) amount is based on a flat dollar amount plus an amount for each year of completed service. Both amounts are indexed annually to AWOTE. For the 2016/17 financial years, the following amounts apply:
- Tax Free
- Flat dollar amount $9,936
- $ Amount for each year of completed service $4,969
Anything above the tax free redundancy amount is generally the taxable (ETP - life benefit) amount and dependent upon age, can be concessionally taxed up to the cap of $195,000 (2016/17 financial year indexed at AWOTE in $5,000 increments).
Neither tax free amount counts against the $195,000 cap. The taxable component [NS2] is included in the assessable income and taxed as follows:
Up to Cap
Amount over Cap
Under Preservation Age
Over Preservation Age
* Tax rates include Medicare and Temporary Budget Repair levy where appropriate.
This cap of $195,000 should not be confused with the superannuation lump sum cap (low rate cap) which operates independently for superannuation payments.
A person's preservation age ranges from 55 to 60, depending on their date of birth.
Date of birth
Preservation age (years)
Before 1 July 1960
1 July 1960 – 30 June 1961
1 July 1961 – 30 June 1962
1 July 1962 – 30 June 1963
1 July 1963 – 30 June 1964
After 30 June 1964
A simple example may help clarify some of these issues. John is 57 years of age and as at the date of redundancy, had been with the same employer for 10 years and 3 months. He receives a genuine redundancy payment (excluding any leave payment entitlements) of $200,000. His tax liability would be as follows:
- Total genuine redundancy (excluding leave entitlements) $200,000
- Tax free redundancy amount = $9,936 +(10 years completed service x $4,969) $59,626
- ETP Taxable amount = Total – tax free redundancy amount $140,374
- Under/over $195,000 Cap? Under
- Below/above preservation age? Over
- Applicable tax rate & tax payable 17% # ($23,864)
- Net amount received = Tax free +(Taxable component – tax payable) $176,136
# Includes medicare levy. Could also include Temporary Budget Repair Levy if other taxable income + taxable component is greater than $180,000.
If John had been under preservation age, while the tax free and taxable components would have been the same, the tax rate would have been higher at 32% (including medicare) resulting in tax of $44,919.
With all the various terms, conditions and elements plus the tax concessions being age and dollar amount dependant, it is very easy for mistakes to be made, particularly in calculating the relevant tax liabilities. Given the importance of the redundancy payment as a financial resource over this stressful period of time, it is important to have the information and details checked by a third party such as a financial planner or accountant to ensure that one does not pay more tax than is necessary.
Often there is a great deal of uncertainty about the timing of being able to return to work. Natural caution (and common sense) would argue that one should plan for the “worst case scenario” and review spending habits and priorities and seek any financial assistance available from Centrelink. While there may be a number of benefits available, they nearly all have various waiting periods so it could be important to register with Centrelink sooner rather than later so as to be in position to access Centrelink as soon as possible.
The key waiting periods that apply to Newstart are:
Ordinary Waiting Period – Starts from the day of claim but the day after the liquid assets waiting period ends and is for one (1) week[NS3] ;
Liquid Assets Waiting Period – generally starts the day after the person ceased work [NS4] and lasts from between 1 and 13 weeks and applies to those with funds that are equal to or more than the maximum reserve amount which is $5,500 if you are single with no dependants, or, $11,000 i[NS5] f you are partnered or single with dependants.
The liquid assets waiting period is calculated differently depending on whether the recipient is single or a member of a couple or has a dependent child:
If the recipient is…
Then the LAWP is calculated by…
a member of a couple with or without a dependent child, OR a single with a dependent child
liquid assets minus the maximum reserve amount, divided by $1,000.
a single AND does NOT have a dependent child,
liquid assets minus the maximum reserve amount, divided by $500.
Income Maintenance Period (IMP) [NS6] - is a waiting period for having received some form of payments such as sick leave, annual leave or a redundancy payment. It begins from the day the recipient receives their leave entitlements. Essentially the amount of money paid upon termination will determine the length of your Income Maintenance Period. This example from Centrelink provides a typical case study:
Michael has been made redundant from a company and on the day of leaving he receives a redundancy payment consisting of:
- 5 weeks annual leave,
- 5 weeks long service leave,
- $25,500 gratuity payment (also known as a 'golden handshake'), and
- 4 weeks payment in lieu of notice.
Michael's IMP will be calculated as follows:
- 5 weeks annual leave = 5 weeks IMP,
- 5 weeks long service leave = 10.5 weeks IMP,
- $25,500/$1,000 (Michael's gross weekly income) = 25.5 weeks rounded down to 25 weeks IMP, and
- 4 weeks payment in lieu of notice = 4 weeks IMP.
The total IMP period will be 44.5 weeks. Michael's total redundancy payment will be apportioned as ordinary income over this 44.5 week period and assessed under the applicable income test
Being made redundant is often a traumatic and emotionally challenging experience for all involved. At such times, the following checklist may be useful to ensure that all the important points are covered:
- Don’t panic and make rash decisions;
- Know the entitlements as per the relevant award or agreement or contract;
- Check (or have checked) all calculations upon receipt – particularly tax!
- Seek professional financial advice;
- Register with Centrelink to find out the applicable entitlements and get any waiting periods begun (& ended) as soon as possible;
- Prepare a budget in light of the circumstances – finding work may take longer than first expected;
- Consider clearing expensive debt – credit cards etc – if applicable;
- Review super, insurance and health insurance arrangements to ensure continued coverage;
- If there are company provided cars, phones etc they may need to be replaced;
- Consider any novated vehicle leases as they may need to be allowed for;
- Inform creditors & consider changing the payment terms to anticipate and minimise any financial stress;
- Investigate and use all possible resources – outplacement/ networking contacts/internet search;
Above all, one should strive to maintain a positive attitude, to focus on positive attributes, seek professional financial advice, make use of all business related contacts and to, as much as possible, get in front of potential employers. Generally, the longer one is out of the relevant business scene, the harder it can be to get back in!
[NS1]ITAA s 82-130
[NS3]Guide to SS Law 220.127.116.11