As businesses continue to cut costs and close under-performing operations, the number of people being retrenched or offered voluntary redundancy is on the rise.
While this can be extremely stressful for employees and their families, the good news is that there are several planning strategies which are potentially useful in this area. It is therefore worth exploring your options before you leave your job.
Ten points to keep in mind
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Redundancy statements are not reported in a standard format. They are produced by the employer and may contain mistakes and/or mis-classifications. They should be checked to ensure the right amount is paid to you and the correct amount of tax is deducted.
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If you do not have another job to go to immediately, you might need a Centrelink Employment Separation Certificate. Your ex-employer must provide this to you but only if you request it. Likewise, the certificate should accurately state the reason for stopping work. An incorrect reason may lead to adverse consequences for both the employee and employer.
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Just because you have been dismissed from a job or offered a redundancy package doesn’t necessarily mean you have been made genuinely redundant.
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While early retirement schemes receive the same tax treatment as genuine redundancies, there are important differences as well.
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The redundancy payment may include unused RDOs, sick leave, payments in lieu of notice, ex gratia payments and severance payments but not if employment was terminated under normal circumstances (e.g. resignation).
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It is important to understand how the tax-free redundancy component of the termination payment is calculated. Not all redundancy payments will be tax-free.
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Directed termination payments can no longer be rolled over into super (effective from 30 June 2012).
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When deciding to take a voluntary redundancy, you need to consider the job market for your skills objectively.
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Check that your super has received all outstanding super contributions before transferring to another fund. Other options like insurance cover also need to be evaluated.
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If you have income protection insurance, you should check the policy wording to see what impact unemployment has on your cover. Some policies have involuntary unemployment premium waivers.
| Type of redundancy payment | Tax treatment |
|---|---|
| Genuine redundancy payment | The first $9,514 plus $4,758 for each completed year of service is tax free. The remainder is taxed as an eligible termination payment (ETP). |
| Eligible termination payment | If you are aged under 55, the amount below $180,000 is taxed at a maximum of 31.5% and any amount over that is taxed at 46.5%. If you are aged over 55, the amount up to $180,000 is taxed at a maximum of 16.5% and the balance is taxed at 46.5%. |
| Accrued annual leave or sick leave | Taxed at a maximum of 31.5% if genuine redundancy or marginal rates if termination is voluntary. |
| Accrued long-service leave | If you started your current job after 1978, taxed at a maximum of 31.5% if a genuine redundancy. If termination is voluntary, 31.5% from Aug 1978 to Aug 1993 and at marginal rates after this. |
There are many planning strategies available in this area, especially if your ex-employer is willing to be flexible in terms of how the redundancy is paid. It is therefore vital to get advice on your redundancy options before making any final decisions.