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Dealing with Redundancy and the role that Termination Payments Play
There are several kinds of payments that you may receive from your employer when your employment is terminated due to redundancy. These can be divided into three main categories with specific tax implications for each of them. Each of the three types (Tax-free Redundancy Payments, Employment Termination Payments and Other Termination Payments) will be discussed in turn:
Tax Free Redundancy Payments
If the termination of your employment is classed as a ?bona fide redundancy? you will be eligible for a tax free redundancy payment that you have to take in cash. The two main criteria for a redundancy being considered bona fide is that you should be under 65 years of age and that you should not be replaced by anybody else. For the 2008/9 financial year the maximum amount that you can receive is determined using the following formula: $7350 + $3676 for every completed year of service.
If your total redundancy payment is less than the amount reached by applying the formula, the entire payment will be tax free. If your payment is more than the amount above the tax free threshold will be treated as an Employment Termination Payment (see below).
Employment Termination Payments
It could be that you are entitled to certain Employment Termination Payments (ETPs) upon leaving employment. Some possible examples include: Redundancy payments above the tax free amount (see above), accrued sick leave and ex gratia payments. How this money will be viewed by the tax office depends on how long you have been in employment and on what was stipulated in your contract or workplace agreement:
?If the payments that you are entitled to were described in your contract or workplace agreement before or on 9 May 2006 you will be eligible for the application of transitional employment termination payment rules. These rules will be applied to payments received between 1 July 2007 and 30 June 2012.
?If none of the above is applicable in your case, you will have to pay tax under the non-transitional employment termination payment rules.
The rules that apply in each case are the following:
Transitional ETP rules
The main benefit of the transitional rules is that you have the option to receive payment as cash or to have the ETP paid straight into your super fund. Rolling over your payment into your super can of course be a very tax efficient way to maximise your retirement savings and it can also help you to qualify for the NewStart Allowance (or increase the amount that you receive under the scheme). You should keep in mind however that any funds paid into your super fund have to stay there until you reach 55. It is therefore not the best option if you need ready access to the funds.
The main benefits of electing to have your ETP paid into your super are the following:
?You will in most cases pay less tax if it is paid directly into your super. (For example: If you are under 55 the tax rates for cash payments will range from 31.5 to 46.5%, whereas payments into a super fund will be taxed at 15% for the first $1 million)
?Investment earnings in super funds are taxed at a lower rate than those earned on the ?open market? (15% against 46.5%!)
Non-transitional ETP rules
Payments under the non-transitional rules have to be received as cash (after deduction of relevant taxes) and you don't have the option of having the funds paid directly into your super fund. This means that you cannot make use of the initial lower tax payment, when paying into a super fund that is available under the transitional rules. You can however still elect to pay some or all of the funds into your super fund as a way to boost your nest egg and to make use of the lower rate (15%) at which investment earnings in super funds are taxed. You should remember however that all funds you place into a super fund will be ?locked in? until you reach the age of 55.
The rates at which employment termination payments are taxed under the non transitional rules are as follows:
?If you are under 55: First 145,000 taxed at 31.5%, thereafter 46.5%
?If you are over 55: First 14,000 taxed at 16.5%, thereafter 46.5%
General Termination Payments
Most employees are entitled to at least some of the following payments when leaving an employer:
?Accrued Annual Leave: The full amount is taxable at 31.5%
?Accrued Long Service Leave: If the service was before 16/08/1978, 5% of the amount will be taxed at your marginal tax rate. If your service was after this date the full amount will be subject to the maximum tax rate of 31.5%
?Final Salary: The full amount will be taxable under your marginal rate
The tax for most of the payments listed above will be deducted and paid over to the tax office by your employer. The exception is payment for long service leave for service before 16/08/1978. In this case you will have to declare your liability on your tax return.
General termination payments could be used to fund your immediate needs or it could be paid into your super fund as a way of capitalising on the lower tax rates on the proceeds of investments in super funds.
Making the correct decisions on what to do with the payments you receive when leaving your employer can be quite difficult and complex. It would therefore perhaps be more than worth your while to discuss all your options with a financial adviser.