Understanding redundancy payments

Cecile Apolinario explains the impact redundancy and other employer payments can have on various Government benefits and income support payments.

Understanding the implications of redundancy and other employer payments can allow you to help your clients manage their cash flow position and achieve their objectives — both immediate and long-term.

Types of employer payments

In the event of a redundancy, a client can receive a range of payments from their employer, including:

• The tax-free amount of a redundancy payment, which is paid as cash;
• An employment termination payment, which could comprise a redundancy payment exceeding the tax-free amount, an ex-gratia payment and unused sick leave. These payments will generally need to be taken as cash. However, if a client is eligible for the transitional rules, they also have the option to roll over the money to a super fund as a directed termination payment (DTP); and
• Other termination payments, such as accrued annual leave/long service leave and final pay, which are paid as cash.

Tax implications

While it’s beyond the scope of this article to explain the tax implications in detail, it’s important to know that, with the exception of the tax-free amount of a redundancy payment and a DTP, all of the payments outlined above will be included in your client’s assessable income.

A redundancy could therefore reduce a client’s entitlement to benefits where eligibility is based on assessable income and certain other amounts. Examples include Government co-contributions and the spouse super contribution tax offset.

The same employer payments will also be included in the client’s taxable income, unless they’re eligible to claim substantial tax deductions. As a result, a redundancy could:

• Adversely impact benefits where eligibility is based on taxable income and certain other amounts, such as Family Tax Benefit Part A and B, the Baby Bonus and the Child Care Benefit;
• Reduce various tax offsets, such as the low income tax offset and senior Australians tax offset; and
• Increase the Medicare Levy surcharge liability.

Income support payments

If a client is made redundant, the actual payments they receive from their employer won’t be counted as income towards the Income Test when Centrelink assesses their eligibility for a range of income support payments.

However, depending on what they do with the money, it may be assessed under the assets test and subject to deeming. Clients may also need to serve an ‘ordinary waiting period’, ‘income maintenance period’ and ‘liquid assets waiting period’ before Centrelink will make the payments. 

Income maintenance period

The income maintenance period is the period during which a client may be expected to support themselves using leave or redundancy payments that they (and their partner) receive from an employer.

Centrelink will generally treat leave and redundancy payments as income for a period equal to the length of time the payments relate. For example, if a client receives four weeks of annual leave, an income maintenance period of four weeks will generally apply from when the payment is received.

Where a client receives a redundancy payment as cash, the amount is divided by their weekly wage to determine the number of weeks that apply. However, monies rolled into super as a DTP are exempt from this waiting period.

If the income maintenance period is below a certain level, the client may be eligible to receive part of the payment during the waiting period. If a client has to spend money on expenses considered ‘unavoidable’ or ‘reasonable’, the waiting period may be reduced. Examples include essential repairs to the car or home, one-off payments to credit cards and personal loans and essential medical expenses.

Conversely, amounts used to make ‘avoidable’ payments, such as lump sum mortgage payments, rent, holidays and large personal super contributions may not result in a reduced waiting period.

Liquid assets waiting period

Up to 31 March 2011, a liquid assets waiting period of at least one week will need to be served if a client’s liquid assets on the day they become unemployed exceed:

• $5,500 (if they are single with no dependent children), or
• $11,000 (if they are partnered or single with dependent children).

The waiting period then increases by one week for each additional $500 or $1,000 in liquid assets that exceed the above thresholds up to a maximum of 13 weeks.

From 1 April, 2011, the thresholds will decrease from $5,500 to $2,500 and $11,000 to $5,000 respectively.

Liquid assets are funds that are readily available to the client (or their partner) and include, among other things:

• Cash on hand;
• Money held in banks, building societies and credit unions;
• Shares, debentures and term deposits;
• Managed investments (such as investment bonds and unit trusts); and
• Genuine redundancy payments that aren’t DTPs.

An exemption may apply if a person (or their partner) has been subject to a liquid assets waiting period in the last 12 months.

Serving the waiting periods

The waiting period starts when a client contacts Centrelink and applies for income support. It’s therefore important that clients contact Centrelink as soon as possible. The income maintenance and liquid assets waiting periods can be served concurrently. As a result, the longest waiting period will apply. If a client experiences financial hardship during the waiting period, they can appeal to Centrelink and the waiting period may be reduced.

Cecile Apolinario is a technical consultant with MLC Technical