Navigating redundancy

With projections of almost 10% unemployment by the end of the year, redundancy is a real concern for many families. And if you feel it’s a possibility for you or a family member, here is some information to help you prepare yourself and to better understand how redundancy payments work.

redundancy

How to prepare for redundancy

With projections of almost 10% unemployment by the end of the year, redundancy is a real concern for many families. And if you feel it’s a possibility for you or a family member, here is some information to help you prepare yourself and to better understand how redundancy payments work.

Being made redundant is likely to be one of the toughest challenges of your working life. It can either be forced or voluntary, the latter being where it’s your choice. In the current climate, however, it’s more likely to be one that is forced on you. However it occurs, you shouldn’t take it personally as it is the job that is being made redundant – not the person.

Not having any income coming in could have a huge impact on your financial well-being, even if you receive a large payout, so you need to manage your money carefully.

The unexpected termination of your employment may lead to feelings of grief and despair for you or your family member. If this is the case, it’s important to understand that these emotions are natural and, in time, will pass. Whether you are consciously aware of it or not, you may be grieving the loss of a network of friends, social status, a comfortable lifestyle, a comfort zone, peace of mind, an appreciation of self-worth, or even your dreams and ambitions.

However, redundancy can also be an opportunity to reflect upon your achievements, take a break, re-evaluate your goals and career aspirations, and to plan a new path forward for the future.

Regardless of your situation and future intentions, you will need to understand and make some important decisions about your finances. This includes understanding any redundancy or employee termination payments that you may be entitled to and the tax you may be liable for.

Taxation of redundancy payments

If you leave your employer, the payments you receive depend on the circumstances surrounding your departure and your employment agreement.

If you’ve been made redundant because your employer no longer requires the job you were doing as part of their business, you are considered to receive a ‘genuine redundancy’ payment. Genuine redundancy payments are tax-free up to a certain amount.

The payments you could receive are either considered Eligible Termination Payments (ETPs) or not ETPs.

These payments are ETPs These payments are not ETPs
Genuine Redundancy and Early Retirement Scheme payments in excess of the tax-free amount Genuine Redundancy and Early Retirement Scheme payments within the tax-free amount
A gratuity or golden handshake Unused annual leave
Payments in lieu of notice Unused long service leave
Unused sick leave  

Calculating the tax-free portion of your redundancy payment

To calculate the tax-free portion of your redundancy payment:

Take the figure of $10,989 and add $5,496 for each completed year of service with your employer. This is the formula for the 2020/21 financial year.

For example

If you have been employed for 5 years, you are entitled to receive a maximum tax-free redundancy payment of:

$38,469 – that is, $10,989 + ($5,496 x 5 years)

In this situation, if your genuine redundancy payment totalled $50,000, then only $11,531 ($50,000 - $38,469) would be taxed as an ETP.

Annual and long service leave taxation

Any unused annual leave and long service leave will also be paid to you along with your redundancy payment. Your employer will withhold a certain amount to pass onto the ATO for tax purposes. When you complete your tax return, depending on your final tax liability, the ATO will either refund you, request an additional payment from you or accept the amount of tax the employer has provided as correct.

Other types of payments you may receive when you leave your employer include unused rostered days off, unused sick leave and gratuity payments. These are classified as ETPs and are taxed concessionally but not as much as payments that are redundancy related, non-ETPs.

Extension to the age limit for genuine redundancy payments

The government has extended the age at which you can access the concessional tax treatment for genuine redundancy payments. This has been increased from the age-based limit of 65 years of age, to age-pension age which is based on your date of birth.

Making the right decisions

Job loss can be a very stressful experience. Friends and family may be able to offer emotional and financial support while you assess your situation and options, and professional counselling may also be beneficial should you feel overwhelmed by your predicament.

Managing the reality of a redundancy involves many important financial decisions that can only be made with consideration given to your personal circumstances. This may involve:

  • assessing your financial position and your ability to meet your financial commitments
  • identifying and securing any employer payments that you may be entitled to
  • identifying any Government assistance you may be entitled to
  • understanding/assessing your personal insurance.

Seek financial advice

If you are or if a family member has been made redundant, it’s crucial to get tax and financial advice.

And remember, don’t take your redundancy personally. While it can be a negative experience, it could also turn out to be a turning point for your career.

Your financial adviser can help talk you through your situation and how you can best manage any redundancy payout. If you don’t have a financial adviser, we can put you in touch with one.