The Australian Bureau of Statistics announced a record 932,000 jobs were lost between the March and June 2020 quarters in the wake of COVID-19(1).
If you are facing a possible redundancy at work due to the aftermath of COVID-19, or a company restructure, this is considered a significant life event that may impact your career, family, mental health and financial wellbeing. For those who are ready to retire, termination payments are likely to be a welcome windfall, but for those who don’t have retirement on the near horizon, you may find redundancy stressful, as it tends to happen during an economic downturn when it may be harder to find a new job.
The immediate issue to consider is whether you have enough money to tide things over until the next job comes along. If you are working with a Financial Adviser, then they will have a good idea of what your current financial position looks like, and how long you can manage without a job. Your Financial Adviser can discuss different options to consider when it comes to a redundancy payout.
This is a great opportunity to make a real difference to your situation during a challenging time, and, if you are the employer, you may be able to support your employees to achieve a better outcome.
Genuine redundancy payment (GRP)
Payments on termination due to redundancy attract more generous tax concessions than if the employee resigns. If you are offered and accept a redundancy, it is worth knowing about the tax concessions and the conditions that must be met to be eligible.
A GRP must satisfy the following conditions:
The employee is dismissed because the employee’s position/ role no longer exists
There is no arrangement between the employer (or another entity such as a company associated with the employer) and employee to rehire the employee after dismissal
Where the relationship between the employer and employee is non arm’s length, the payment cannot be greater than the amount that would be reasonably expected if the relationship was at arm’s length
The dismissal occurs at the earlier of the following:
– before the employee attains Age Pension age, or – before the employee attains the age, or completes a period of employment, when employment would have terminated
If these conditions are not met, the employee is ineligible for the tax concessions that apply to GRPs. For example, where redundancy occurs on or after Age Pension age, the employee is not eligible for a tax-free GRP.
Payments on termination
Payments that may be received by an employee who is made redundant include:
salary and wages, overtime, bonuses and allowances
unused annual leave and long service leave
a gratuity or ‘golden handshake’
genuine redundancy or early retirement scheme payments
non-genuine redundancy payments (eg redundancy occurs after employee reaches Age Pension age)
payments in lieu of notice
unused sick leave
unused rostered days off
Taxation of payments
Payments on termination are categorised to determine how they are taxed. If you are offered a redundancy, you can plan ahead by asking your employer for an estimate of the payments you will receive, including withholding tax amounts. Your employer can provide you with an income statement at termination or you can obtain this from the Australian Taxation Office (ATO).
Payments eligible for concessional tax treatment attract tax offsets so that the tax paid does not exceed the concessional tax rate. Tax withheld by your employer reduces the final tax payable and if too much tax was withheld the excess is refunded to you.
Your Financial Adviser can help you identify and work out:
Payments for earned income
Tax on unused annual or long service leave
Non-excluded employment termination payment (ETP), the taxfree genuine redundancy payment (GRP) and the excluded ETP
As well as working out any payments, your Financial Adviser can discuss other financial and personal considerations, including:
How ongoing expenses can be met and for how long
Whether you intend to retire and if not, how long it may take to find another job
Other financial resources available to you
Eligibility for social security payments and/or Family Tax Benefits
Whether your employer has the flexibility to ‘time’ the redundancy and termination payments to assist with a better tax outcome
Whether deferring taxable income (for example deferring the sale of investments with capital gains implications) will have a favourable outcome
Your capacity to make personal deductible super contributions
What you would like to do if you do decide to retire, and what your retirement lifestyle will look like given your financial situation
If you decide to return to the workforce, whether your next job can pay a similar salary or if you take a pay cut in the current economic environment
A redundancy may be beneficial if you’re ready to retire but stressful if you need to find a new job in a challenging economic environment. Some employers may be able to offer flexible payment arrangements on termination to facilitate a better tax outcome.
A Financial Adviser will discuss both the impact of a redundancy on your overall financial situation and how to achieve a favourable payment outcome.
Source: IOOF 1 Source: Labour Account Australia
Terry Panigiris , Angela Menendez, Elise Hamill, Nicholas Bregolin and CBD Corporate Financial Centre Pty Ltd t/as CBD Advisory are Authorised Representatives of ASVW Financial Services Pty Ltd. ABN 27 007 261 083 I AFSL 446176. Any of our content that may be considered to be advice has been prepared without taking account of your objectives, financial situation or needs. Before you act on the advice, you should consider whether it is appropriate to you, having regard to your objectives, financial situation and needs. Where this advice relates to the acquisition of a financial product, you should obtain and consider the Product Disclosure Statement for the product before you make a decision about whether to acquire the product.
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