Redundancy can come as a shock but it can also present you with opportunities to take advantage of when you appropriately plan and understand the tax implications. A redundancy payment consists of money in lieu of notice and an incentive payment generally based on years of service and can vary depending on company policy.
Generally a termination payment, including any unused sick leave made on a genuine redundancy is tax free up to a certain amount. This is calculated by applying the Australian Tax Office’s (ATO) base amount of $10,155 plus $5,078 for each completed year of service. These amounts apply in the 2017-18 tax year and are indexed each 1 July. Example below:
Redundancy payment tax-free threshold after five years service
|Each completed year of service||$5,078|
|Five years’ service total||$10,155 + $25,390|
So if you were retrenched after five years, your termination payment up to $35,545 will be tax free.
If your redundancy payment exceeds this tax-free threshold, the surplus will be treated as an employment termination payment (ETP) which is concessionally taxed up to certain thresholds.
One exception is that if you are made redundant at age 65 or more, your entire redundancy payment is an ETP and concessionally taxed.
If your retrenchment is close to the end of the financial year this may increase your tax burden as you’ve already received an income for the best part of the year. A better strategy assuming your employer is willing to assist you, is to take your redundancy pay at the start of the new financial year when you’ll be looking for a new income source and more likely to slot into a lower tax bracket.
Redundancy may not be high on everybody’s wish list but there are plenty of ways to turn a negative into a positive with the right planning.
If you would like to know more about the tax implications of your redundancy payment, call us for a chat today on 03 5443 0344.