Redundancy payments are in the air again, with the WA Government announcing plans to cut the number of public servants.
However, there is a nasty little surprise lurking in the tax laws for people over age 65. The tax treatment is very different either side of 65.
Just to be clear, what we are talking about are specific REDUNDANCY PAYMENTS. These are separate from superannuation and a range of other exit payments. Broadly speaking, a redundancy payment is a specific extra payment that is made when an employees’ job has been abolished, and the person is no longer required. Redundancies can be either voluntary, or not.
Back to the main topic – the tax treatment of redundancy payments.
Genuine redundancy payments receive generous tax concessions in the form of a tax free amount – if you are under 65.
The amount that is tax free depends on your years of service with that employer, and is calculated as follows:
$10,155 + $5,078 for each year of service.
Thus, somebody who has 10 years of service, will be able to receive up to $60,935, totally free of tax. Naturally, there is a limit on how much you can get tax-free. If the formula produces an answer above $200,000, then the limit will be $200,000. However, you will need more than 37 years service to reach the maximum. In that case, you really would qualify as a “long term employee.” Please note, the amount you are entitled to will depend on the arrangements your employer has in place to cover redundancies. You may receive more or less than the tax-free amount.
If you receive more than the tax free amount, the excess will be treated as an Eligible Termination Payment (ETP for short).
Here is the catch (for some people), anybody aged 65 or over, who receives a redundancy payment, DOES NOT QUALIFY FOR THE TAX FREE AMOUNT. It is all treated as an ETP. ETP’s are taxed via a special formula, and the amount you pay depends on your circumstances. The tax rate can be up to the top personal rate.
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
John Cameron is one of the best qualified, most experienced, respected financial planners in Australia - Call now, for a no-cost consult. (08) 9322 7818