Redundancy – reduced tax on genuine loss-of-job payments
Within certain limits, tax on loss-of-job payments is lower than the normal tax rates. To determine the tax applicable, payments for genuine redundancy and early retirement schemes need to be separated into tax categories:
Redundancy – Tax Free Component
There are automatic tax free amounts calculated according to a formula which specifies
- a base amount; to which is added
- an additional amount multiplied by years of completed service.
These formula amounts are indexed each year, as shown in the table below.
An employee with 8 completed years of service is retrenched and receives a lump sum redundancy payment of $65,000 in January 2015.
“Years of service” – The Tax Office has ruled that if earlier years of service with a previous employer are carried over and acknowledged on commencement with a new employer that later makes a redundancy payment to an employee, those years of service can be included in working out the tax-free amount of the genuine redundancy payment. See more on this here: PBR 1051239750456
The tax-free redundancy component (using 2014-15 values) is:
Formula: $Base_Amount + [8 times the Additional_Amount]
Numbers: $9,514 + [8 x $4,758] = $47,578.
The employer should separately identify tax-free components in the employee’s payment summary, which then do not need to be shown in the employee’s income tax return.
The redundancy tax free base amount and additional amounts:
|Income Year||Base Amount||Additional Amount per|
completed year of service
Tax free amounts are adjusted annually each year in line with movements in the Average Weekly Ordinary Time Earnings (AWOTE).
Pre 1 July 1983 service component (tax free)
The amount of a genuine redundancy or early retirement scheme payment which is not tax free, must be apportioned between pre-1 July 1983 service and post-30 June 1983 service.
In most cases, this is done with a simple ratio of calendar days compared to the total period (or sum of separate periods) of service.
The pre-July 1983 segment is tax free.
Post 30 June 1983 service and everything else (taxable)
The taxable components of a genuine redundancy or early retirement scheme payment are simply those parts which are not tax free. The taxable amounts are classed as an ETP (Employment Termination Payment) and taxed according to the Life Benefit ETP taxing rules.
ETPs are concessionally taxed up to the cap amount, with the amount of the concession (i.e. the reduced tax rate) being based on the preservation age of the employee at 30 June.
ETP Concessional Caps
The ETP cap amount is indexed annually in line with AWOTE in increments of $5,000 (rounded down).
Taxable ETP amounts paid over the cap are taxed at 45% (47% from 1 July 2014 to 30 June 2017) plus Medicare.
- for amounts under the cap for employees under preservation age (at 30 June) – the tax is limited to 30% plus Medicare
- for amounts under the cap for employees at or above preservation age (at 30 June) – the tax is limited to 15% plus Medicare
- death benefit amounts under the cap paid to a dependent are tax free
- for death benefit amounts under the cap paid to a non-dependent the tax is limited to 30% plus Medicare
When tax is limited to a fixed percentage on income, an offset (rebate) is calculated in your tax assessment to ensure the specified tax rate is preserved.
What is a Genuine Redundancy?
To be considered “genuine”, and therefore eligible for the tax concessions, a number of conditions must be met for genuine redundancy payments.
Redundancy results from the action of an employer, when the employer no longer requires particular work to be carried out. This is when:
- a job is no longer required to be done
- the decision to retrench is not based on normal staff turnover
- the basis of termination is not specific to an individual employee, i.e. it relates to a category or class of employees
Payments which generally qualify include payments in lieu of notice, time based calculation of severance or redundancy payments and lump sum gratuities.
To be eligible for concessional tax treatment, an early retirement scheme must be approved by the Tax Office, usually before implementation, or by exercise of discretion after the fact.
An acceptable early retirement scheme requires the following features:
- must be offered to all employees in an approved class
- must be due to a rationalisation or re-organisation of the employer’s operations
- payments under the scheme must be in addition to the ETP which would be paid on a voluntary retirement
- retirement must be “early” i.e. earlier than 65, or as from 1 July 2019 earlier than the age pension age*, or if it would have been sooner, the normal retirement age
- payments must be “arms length” values
- there must be no arrangement for re-employment
*In the 2018-19 MYEFO, the Government announced that from 1 July 2019 it would extend the concessional tax treatment of genuine redundancy and early retirement scheme payments to those under Age Pension qualifying age.
This is in the context of the age pension age being progressively increased from 65 to 67 years, such that some taxpayers would otherwise be disqualified from the early retirement/redundancy tax concession as being over the age of 65, yet still not eligible for the age pension.
The Treasury Laws Amendment (2019 Measures No. 2) 2019 giving effect to this measure was passed by parliament in October 2019 and takes effect from 1 July 2019. See further information here.
- Approved early retirement schemes
- Recent example of an approved early retirement scheme
- Tax Ruling 94/12 – “Approved early retirement scheme and bona fide redundancy payments”
- Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments
- ETP payg withholding rates (Schedule 11 Table A)
This page was last modified 2019-12-06