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The restructure of a business may lead to a reduction in staff numbers with certain positions being made redundant. Most people whose position is made redundant find it a very difficult time to deal with.

Written and accurate as at: 9 Mar 2015

The restructure of a business may lead to a reduction in staff numbers with certain positions being made redundant. Most people whose position is made redundant find it a very difficult time to deal with.

A variety of emotions are typically experienced ranging from shock and anger to relief and hope.

Importantly, the change resulting from a redundancy can be the start of new possibilities such as a career change, the chance to reskill or retrain or the ability to take a well-deserved break or holiday.

The size of the redundancy payment can differ significantly on a range of factors. Regardless of the amount, it is important that you give careful consideration to how best to use the redundancy payments to provide for your short term needs as well as securing your future.

It is important to understand the payments you are receiving, the tax implications and the choices available to you. Payments received as part of a genuine redundancy program can be concessionally taxed to help your money last longer.

The steps you should consider for dealing with your redundancy are listed below:

Step One: Identify payments to be received
Step Two: If paid under an approved early retirement or redundancy, calculate tax free amount
Step Three: Estimate tax payable on taxable amounts
Step Four: Determine what to do with the received amount after tax proceeds

Let’s look at these steps in more detail.

Types of payment on termination of employment

When you cease employment the lump sum paid by your employer may comprise a number of payments. The first step is to identify which parts are included in the definition of an “employment termination payment” (ETP) and which are not. This is important as it can influence tax liabilities and the actual amount of money you have to work with.

Potentially included in the “employment termination payment” NOT employment termination payments
Redundancy and approved early retirement scheme payments in excess of tax-free amount The tax-free portion of a genuine redundancy or approved early retirement scheme payment
Unused rostered days off (RDOs) Unused annual leave and/or leave loading
Payments in lieu of notice Unused long service leave
Unused sick leave Salary, wages, and allowances owing to the employee for work done or leave already taken
A gratuity or golden handshake Compensation for personal injury
Compensation for loss of job An advance or loan

The next step is to calculate the tax on each payment so you can determine the net amount remaining after tax.

Calculating the tax-free portion of the Redundancy Payment

If you receive an employer payment under a genuine redundancy or approved early retirement scheme, part of the payment may be tax-free based on the number of years with that employer.

For 2014/15 the tax-free amount is: $9,514 + [$4,758 x each completed year of employment]

So if you have been with your employer for 10 years, the tax-free portion would be $9,514 plus $4,758 X 10 years, totalling $57,094. This tax-free amount is not included in your ETP.

Taxation of employment termination payments

The taxable portion of a genuine redundancy or approved early retirement scheme is part of the ETP (in addition to the other payments outlined in the table above). However, if you were employed by your employer before 1 July 1983 or leave employment due to invalidity the ETP may include a further tax-free component.

The ETP must be taken in cash and lump sum tax is deducted by your employer.

The tax deducted depends on your age as shown in the table below for 2014/15.

Employment termination payment Amounts up to $185,000 Amounts over $185,000
Under preservation age 30%* 47%*
Over preservation age ^ 15%* 47%*

* Plus Medicare levy.

^ Applies if payment is received after preservation age or in the year in which preservation age will be reached.

Taxation of unused leave payments

Unused annual leave and long service leave payments are not part of the ETP but may still receive concessional tax treatment if received due to redundancy or approved early retirement.

The payments are included in your assessable income but the tax is limited to the rates shown in the tables below however, as they are included in assessable income they may impact your entitlements to other tax offsets or benefits. The following rates of tax are deducted by your employer.

Leave payment Proportion Tax
Unused long service leave Pre 16 August 1978 proportion 5% is included in your assessable income and taxed at your marginal rate*
Post 15 August 1978 proportion 100% is included in your assessable income and taxed at 30%*
Unused annual leave All amounts 100% is included in your assessable income and taxed at 30%*

* Plus Medicare levy.

The impact on Centrelink

Before making plans for how to spend the money, you should also consider the future and your prospects for returning to work.

The payments received may create a ‘waiting period’ during which you will not qualify for any income support from Centrelink. This can be a substantial period of time so you need to ensure you have access to money to meet your living expenses during this time.

The upside of redundancy

If you plan ahead and use the redundancy payments wisely you can take some of the stress out of redundancy. Some options available to you include:

  • Repaying debt: Use your net redundancy payment to reduce the burden of outstanding debt. This can include paying down your mortgage, personal loans and credit card debt.
  • Commence a savings strategy: You can use part of your net redundancy payments to commence a savings plan to meet your medium to long term objectives.
  • Invest for the longer term: This can be an opportunity to invest in an asset that has the potential to provide you with a combination of capital growth and income over the long term. This may include purchasing a property or a portfolio of diversified growth assets.

Redundancy can be a challenging time but don’t lose sight of the significant upside that it can also provide with careful planning and advice.

If you, or someone you know, is made redundant – it is a great time to seek financial planning advice, to maximise your benefit and establish a roadmap for the future.