The value of a genuine redundancy

People facing redundancy should be aware of their workplace and legislative entitlements to help ensure they do not miss out on receiving the correct redundancy payout.

Payments are governed by complex tax laws, as well as employees’ contracts of employment and labour laws, so getting good financial advice is a starting point to understanding entitlements from employers and the Government.

What is a genuine redundancy?

As the economy slows down, more employers will be making workers redundant. A genuine redundancy payment is one received by an employee who is dismissed from employment because the employee’s position is genuinely redundant.

There are necessary conditions that must be met, including:

• employment termination must occur prior to age 65;
• the termination is not at the end of a fixed period of employment;
• there must be no arrangement for re-employment of the employee; and
• the payment is not in lieu of superannuation benefits.

A redundancy payment made by an employer can be made up of all or any of the following payments on termination: payments in lieu of notice; a golden handshake or severance payment; unused sick leave or unused rostered days off.

Entitlements will vary from case to case, so if someone is made redundant, they should check their contract of employment or award to find out their rights.

Is there a tax-free component?

For genuine redundancy payments, taxpayers under age 65 are exempt from tax up to certain limits (this amount is indexed each year to the average ordinary-time wage).

The tax-free component for the 2008-09 financial year is $7,350 plus $3,676 for each completed year of service.

If the person has pre-83 employment service, any amount paid for this period is a tax-free amount.

The tax-free part of the redundancy payment is not included in a person’s assessable income and cannot be rolled over into superannuation.

Amounts in excess of the tax-free component are treated as an Employment Termination Payment (ETP) and will be taxed to rules set out by the Government.

For employees aged 65 and over, the entire payment will be treated as an ETP.

ETPs contain the following components:

• tax-free component (if applicable), which is made up of a ‘pre-July 1983 segment’ and an ‘invalidity segment’; and
• taxable component, which is the balance of the payment after subtracting any tax-free component.

The ETP must be paid as a lump sum (unless you meet the transitional rules outlined below) and tax is payable as per Table 1.

What are the transitional rules?

Under transitional arrangements applying between July 1, 2007, and June 30, 2012, it is possible to roll over an ETP payment to a superannuation fund, which may offer tax advantages, or employees can opt to receive it as a cash lump sum.

To qualify for the transitional arrangements, the amount of the payment (or method for calculating the payment) must have been specified in a written contract, law, legal instrument or workplace agreement as at May 9, 2006.

If you qualify for the transitional rules, your ETP payment would be taxed as per Table 2.

Paying into super

If you direct your employer to pay the ETP to a complying superannuation plan, you can take advantage of concessional tax rates (see Table 3).

Amounts up to $1 million directed to superannuation are excluded from the concessional contributions cap.

What about annual leave and long service leave entitlements?

On genuine redundancy, 100 per cent of your annual leave is included in your assessable income and taxed at your marginal rate.

Long service leave on genuine redundancy will be taxed as per Table 4.

How can Centrelink help?

A person may be entitled to income support from Centrelink if they are made redundant.

Consideration needs to be given to which payment the person would be eligible for, how long before payments would commence and the amount they would receive under income and assets tests.

If a person made redundant is under the age pension age (at least 63.5 years), they may only be eligible for the jobseeking allowance, Newstart. But if they are over the age pension age, pension payments are favoured over Newstart because of more lenient income and assets tests.

What are the waiting periods?

Redundancy payments may impact on waiting periods before income support is payable from Centrelink.

Annual leave, long service leave and redundancy payments are generally treated as income over the period for which the annual or long service leave was paid and Centrelink will not pay benefits for that period (called the income maintenance period).

For example, a person who receives a 12-week redundancy payment won’t receive any income support for 12 weeks from when that redundancy payment was received.

Separately, claimants may not receive income support (such as Newstart Allowance) for up to 13 weeks from receiving their payout if they have liquid assets like cash over a certain level, though the waiting period runs concurrently with any income maintenance period.

However, legislation was recently passed to implement a temporary relief measure (effective from April 1, 2009, until March 31, 2011) to the liquid assets waiting period.

The aim is to assist individuals who become unemployed because of the financial crisis by doubling the liquid assets threshold.

Therefore, a waiting period will apply from April 1 if you have liquid assets over:

• $5,000 if you are single with no dependants; or
• $10,000 for all others.

Note: clients who are currently serving a liquid assets waiting period will have their waiting period reassessed automatically from April 1, 2009.

Liquid assets may include:

• cash, term deposits or other money available at short notice;
• shares and managed investments;
• loans to other people; and
• payments made or due to be made (within 28 days) by a person’s last employer.

Regardless of the type of payment, money held in a superannuation or rollover fund is an exempt asset under age pension age.

Therefore, using superannuation can be an effective strategy for increasing eligibility for social security support, such as retaining benefits in superannuation.

Dante De Gori is technical manager, ClearView Retirement Solutions & MBF Life.