Redundancies can be confusing, disruptive, and tiresome for both businesses and their employees. The same can also be said about figuring out your tax obligations. However, it is important to understand both as the two often come hand in hand. According to the ATO, businesses need to give ex-employees their payment summaries indicating the amounts paid and the tax withheld by the ex-employer. This is so former employees can complete their income tax returns.
To help cut through the confusion, we’ve prepared a useful guide on what redundancy payments are and their tax implications below.
What is a Redundancy Payment?
Redundancy payments usually receive tax concessions.
In contrast, any money given by an ex-employer which the ATO does not consider to be part of a redundancy payout are generally taxed at normal rates. There are few exceptions to this, a prominent one being unused annual leave.
A redundancy payment may include:
- Monetary payment as a substitute for a lack of notice of redundancy;
- Severance payment (an additional payment which may be based on the employee’s length of service for example); or
- A gratuity or ‘golden handshake’.
A redundancy payment does not include:
- Salary, wages, or allowances owed to the ex-employee for work they have already done
- Lump sum payments for unused annual leave
- Lump sum payments for unused long service leave, or
- Payments made as a substitute for superannuation benefits.
Genuine vs Non-Genuine Redundancy
Once you determine how much of the money given constitutes a redundancy payment, it is important to figure out whether the termination was a genuine or non-genuine redundancy. This is because the classification affects the amount of tax which the payment will incur.
Essentially, a genuine redundancy occurs when the ex-employer decides to eliminate the job an ex-employee was performing, and the ex-employer follows all consultation requirements in the award, enterprise, or other registered agreement. Genuine redundancies may happen for a number of reasons. For example, it could be due to structural changes within the organisation which means some jobs are no longer necessary for business operations. Another reason could be that the company has become bankrupt or insolvent. For more information, you can read our guide on ‘What is Genuine Redundancy?’.
As for non-genuine redundancies, these commonly occur when:
- You reach the normal retirement age of 65 years old and your employer dismisses you
- You voluntarily choose to leave your job or resign
- Your employer terminates your job contract, or
- Your employer dismisses you for disciplinary or inefficiency reasons.
Finally, readers should note that redundancies are different from early retirement schemes and dismissals, and may incur different tax obligations.
Conclusion
It is important to know what exactly constitutes a redundancy payment, and whether redundancies made are classified as genuine or non-genuine. Indeed, it is a necessary first step for determining what an employee is entitled to. For more information on the tax concessions available, see here.
If you are still unsure or want to know more about the implications of redundancies, you may want to consider speaking with an accountant or an employment or taxation lawyer.
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