What you need to know about your redundancy payment

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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%.

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

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