Redundancy: a taxing time

08 September, 2020

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.

Taxation of redundancy payments

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 ETPsThese payments are not ETPs
Genuine Redundancy and Early Retirement Scheme payments in excess of the tax-free amountGenuine Redundancy and Early Retirement Scheme payments within the tax-free amount
A gratuity or golden handshakeUnused annual leave
Payments in lieu of noticeUnused 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.

For example

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:

  • assessing your financial position and your ability to meet your financial commitments
  • identifying and securing any employer payments that you may be entitled to
  • identifying any Government assistance you may be entitled to
  • understanding/assessing your personal insurance.

Did you knowThe Government is planning to extend the following Coronavirus initiatives:

JobKeeper payments extended to 28 March 2021 (extended from 27 September 2020)
The Government will provide $1,500 per fortnight per eligible employee for up to six months, to 27 September 2020, to eligible businesses. Then, the JobKeeper payment is proposed to reduce to $1,200 per fortnight after 27 September 2020 for full-time workers and $750 per fortnight for part-time workers. A further reduction is likely to be made after 4 January 2021.

Coronavirus Supplement extended to 31 December 2020
The Coronavirus Supplement is a taxable $550 fortnightly payment to JobSeeker recipients until 25 September 2020. This reduces to a $250 fortnightly payment from 25 September 2020 until 31 December 2020.

Early access to super available to 31 December 2020 (extended from 24 September 2020).
This extended timeframe to apply to access your super means you can delay your application if you do not want to withdraw your money unnecessarily, for example, if your circumstances change or you find employment or start a new business later in the year.

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.