Super as a redundancy tax sweetener

Employers could sweeten redundancy offers with the chance for employees to roll over money into superannuation, according to a leading Adelaide tax lawyer.

“Before June 30, people can contribute up to $1 million into superannuation, and a large termination payment for the older employee could make such a contribution,” Thomson Playford partner Stephen Heath said.

“If they rolled the redundancy payment into superannuation and then wait until after June 30, this year, to access the benefit tax free from the age of 60,” this would generate a total tax rate of 15 per cent. This compares to a tax rate of 46.5 per cent for termination payments in excess of $140,000.

“The benefits are more for employees rather than employers, but if a company was looking to terminate some older staff, the superannuation options makes the move attractive,” he said.

“But there is only a window of just about two months before the June 30 cut off.”

Next year, the tax effective cap using the same strategy would be $140,000, which is the maximum contribution allowed post July 1 under the new superannuation rules.

“The new taxation and superannuation rules that come into place after June 30 will add a sense of urgency to redundancy negotiations, particularly involving staff in more senior positions,” Heath said.

“For middle range employees, the rollover strategy is not so attractive.”

For small business owners who are selling their businesses, an option is to remain an employee of the firm and the new owners retrench them after the takeover. A termination payment could then be made based on years of taking a below market rate salary, and this could be rolled over.

Heath admits that while this interpretation of the law is untested, it is still legal in terms of taxation and superannuation law.