In the current economic environment, the prospect of redundancy can become an unexpected reality or an unsettling concern for many.
Redundancy can occur for any number of reasons. You may decide to leave your employer by accepting a voluntary redundancy, or you may be made redundant due to forces that are beyond your control.
The unexpected termination of your employment may lead to feelings of grief and despair. If this is the case, it’s important to understand that these emotions are natural and, in time, will pass. Whether you are consciously aware of it or not, you may be grieving the loss of a network of friends, social status, a comfortable lifestyle, a comfort zone, peace of mind, an appreciation of self-worth, or even your dreams and ambitions.
However, redundancy can also be an opportunity to reflect upon your achievements, take a break, re-evaluate your goals and career aspirations, and to plan a new path forward for the future.
Regardless of your situation and future intentions, you will need to understand and make some important decisions about your finances. This includes understanding any redundancy or employee termination payments that you may be entitled to and the tax you may be liable for.
If you leave your employer, the payments you receive depend on the circumstances surrounding your departure and your employment agreement.
If you’ve been made redundant because your employer no longer requires the job you were doing as part of their business, you may be considered to receive a ‘genuine redundancy’ payment. Genuine redundancy payments are tax-free up to a certain amount.
The payments you could receive are either considered Eligible Termination Payments (ETPs) or not ETPs.
|These payments are ETPs||These payments are not ETPs|
|Genuine Redundancy and Early Retirement Scheme payments in excess of the tax-free amount||Genuine Redundancy and Early Retirement Scheme payments within the tax-free amount|
|A gratuity or golden handshake||Unused annual leave|
|Payments in lieu of notice||Unused long service leave|
|Unused sick leave|
Calculating the tax-free portion of your redundancy payment
To calculate the tax-free portion of your redundancy payment:
Take the figure of $10,989 and add $5,4961 for each completed year of service with your employer.
If you have been employed for 5 years, you are entitled to receive a maximum tax-free redundancy payment of:
$38,469 – that is, $10,989 + ($5,496 x 5 years)
In this situation, if your genuine redundancy payment totalled $50,000, then only $11,531 ($50,000 - $38,469) would be taxed as an ETP.
Annual and long service leave taxation
Any unused annual leave and long service leave will also be paid to you along with your redundancy payment. Your employer will withhold a certain amount to pass onto the ATO for tax purposes. When you complete your tax return, depending on your final tax liability, the ATO will either refund you, request an additional payment from you or accept the amount of tax the employer has provided as correct.
Other types of payments you may receive when you leave your employer include unused rostered days off, unused sick leave and gratuity payments. These are classified as ETPs and are taxed concessionally but not as much as payments that are redundancy related, non-ETPs.
Extension to the age limit for genuine redundancy payments
The government has extended the age at which you can access the concessional tax treatment for genuine redundancy payments. This has been increased from the age-based limit of 65 years of age, to age-pension age which is based on your date of birth.
Making the right decisions
Job loss can be a very stressful experience. Friends and family may be able to offer emotional and financial support while you assess your situation and options, and professional counselling may also be beneficial should you feel overwhelmed by your predicament.
Managing the reality of a redundancy involves many important financial decisions that can only be made with consideration given to your personal circumstances. This may involve:
Did you knowThe Government is planning to extend the following Coronavirus initiatives:
JobKeeper payments extended to 28 March 2021 (extended from 27 September 2020)
Coronavirus Supplement extended to 31 December 2020
Early access to super available to 31 December 2020 (extended from 24 September 2020).
If you are receiving or are expecting to receive a redundancy payment please contact us and we can help you understand your personal and financial situation and help you make the most of your payment.
1 These amounts are used to calculate the tax-free portion of a redundancy payment received in the 2020/21 financial year and may be different in previous or future financial years.