What you need to know about your redundancy payment

By

Published on

Employees offered a payout to encourage them to take redundancy need to know the tax implications to understand the real value of the offer.

First, make sure the payment qualifies as a so-called bona fide redundancy or, alternatively, is being made as part of an early retirement scheme.

The former occurs if your position is being abolished as a result of it no longer being required by your employer, while the latter is a tax office-approved scheme to encourage a specific group of employees to resign or retire early.

If either of these arrangements applies, then you will benefit from a tax-free amount, with the remainder of the money being classified as an employment termination payment, most of which is likely to be taxed at 31.5%.

For an individual to qualify, the date of their termination has to be before their 65th birthday, or earlier in industries where an earlier retirement date applies.

In 2011-12 the tax-free amount is $8435 plus $4218 for every completed year of service. Someone with 35 years of service would be entitled to $156,065 of their termination payment tax-free, although the total payment may be less than this.

If it is more, the excess would be classified as an employment termination payment, with the amount accrued, on a proportional basis, before July 1983 being tax-free with the remainder taxed at 31.5%.

Get stories like this in our newsletters.

Related Stories

Missing super contributions? Before you panic, check how long it's been. If the money still hasn't arrived, there are steps you can take, including contacting the ATO to make sure you're getting what's owed.

Peter Freeman is a former managing editor of The Australian Financial Review. He runs his own self-managed super fund.