Being made redundant can be a difficult experience, both emotionally and financially. To ease the stress that comes with job loss, it helps to understand whether you need to pay tax on redundancy payments and whether any other tax implications may come with your payout.
While most people associate redundancy with simply losing a job, the Australian Taxation Office (ATO) has a specific definition for the term. Just to complicate things, the ATO doesn’t tax all redundancy payments in the same way.
This makes it crucial that you determine whether your redundancy is considered “genuine” or “non-genuine” by the ATO. These two categories have a significant impact on how your payments are taxed, so let’s explore them in detail below.
Pro tax tip: If you’re not worried about learning all the ins and outs and would rather just have someone sort out your tax obligations for you, we can help. Use our branch locator to find your nearest ITP office, and then either give us a call, book an appointment online, or drop in for a chat. One of our friendly certified accountants can help you work out your redundancy tax situation.
What Is Genuine Redundancy?
A genuine redundancy payment describes a payment you receive when your job ends and you no longer have employment. This occurs when your employer decides to eliminate your job and terminate your position.
These payments are considered tax-free up to a certain limit, which is determined by your years of service. Any amount above this limit is considered an employment termination payment (ETP) and is subject to concessionary tax rates. Additionally, any amount above certain caps is taxed at your usual marginal tax rate. It’s important to note that the tax-free amount of a genuine redundancy payment is separate from the ETP. Employers will report any lump sum amounts on your income statement or PAYG payment summary – individual non-business.
Employment Termination Payments (ETPS)
ETPs, or employment termination payments, are lump sum payments made when your employment ends.
The taxation of ETPs varies depending on whether they are related to the termination of an employee’s employment (known as “life benefits”) or to the death of the employee (known as “death benefits”). It’s worth noting that in certain cases, a portion or all of an ETP may be tax-free. For example, payments related to invalidity or employment before July 1st, 1983 (although these types of payments are now uncommon).
ETPs are taxed at concessional rates – either 17% or 32% – up to a certain limit or “cap.” The top rate of tax applies to any amounts that exceed the cap. Since there are two caps with different rules, it can be quite complex to calculate the tax for an ETP.
The tax-free limit starts out as a whole dollar amount. However, you’ll get an extra amount for each full year of service completed during your period of employment. It’s important to note that the tax-free limit is subject to indexation changes and is updated on July 1st of each year.
When determining a genuine redundancy payment, you need to exclude certain amounts. These exclusions include:
- Payments for salary, wages, or allowances owed for work already completed or leave already been taken;
- Payments in lieu of superannuation benefits;
- Lump sum payments made upon termination of employment for unused annual leave or leave loading;
- Lump sum payments for unused long service leave paid upon termination of employment under a formal arrangement.
You need to take these exclusions into account when calculating a genuine redundancy payment to ensure compliance with tax regulations.
Taxation of genuine redundancy payments for the 2022/2023 financial year
|Annual leave||100% of the lump sum taxed at 32%* (maximum)|
|Long service leave accrued before 16 August 1978||5% included in assessable income taxed at your Marginal Tax Rate*|
|Long service leave accrued after 15 August 1978||100% included as assessable income and taxed at 32%* (maximum)|
Pro Tax Tip: You must receive your redundancy payments within 12 months of stopping work or the ATO will not treat it as a genuine redundancy. It’s also important to note that ETPs cannot be paid into your super account. If you want to learn a little more about your super fund after finishing this article, head over to our Super Fund Guide (it’ll open in a new tab for you).
Tax-free component of your payment:
|Financial Year||Tax-free Component||Tax-free amount for each year of service|
If you’re below the preservation age, you’ll pay tax at 30% plus the Medicare Levy on any excess above the free component, up to $210,000.
If you’re above the preservation age, you’ll pay tax at 15% plus the Medicare Levy on any excess above the free component, up to $210,000.
At any age, you’ll need to pay tax at 45% plus the Medicare Levy for any remaining amount above $210,000.
Changes to Genuine Redundancy and Early Retirement Scheme Payments
Effective October 29th, 2019, the ATO changed the age limit for employees to receive concessional tax treatment for genuine redundancy and early retirement scheme payments. The age-based limit of 65 years old was updated to align with the age pension age.
As of July 1st, 2023, the age pension age will increase from 66 years and 6 months to 67 years. This change applies to payments made to employees who were dismissed or retired on or after July 1st, 2019.
What Is Non-genuine Redundancy?
A non-genuine redundancy is a type of job loss that occurs under certain circumstances. It happens when an employee:
- Is dismissed because they have reached their normal retirement age;
- Is at or over the age pension age on the day of dismissal;
- Leaves voluntarily;
- Has their contract terminated for cause (i.e. for disciplinary or inefficiency reasons).
In these cases, the employee has to pay taxes on their redundancy payment as part of their employment termination payment (ETP). This means the employee will generally pay taxes at a lower rate than their normal income, as long as the payment does not exceed certain caps.
ITP’s Accounting Professionals have been helping Australian individuals with their tax obligations for over 50 years. If you’re confused about your redundancy payments and related tax obligations, one of our skilled tax agents can help. Phone 1800 367 487 to chat with a friendly professional today.