Redundancy: Three questions your client will ask
By Stuart Sheary, Senior Technical Manager
To say 2020 has brought a lot of change would be an understatement. The lives of clients have changed and many now need advice on redundancy. Clients who have recently been made redundant are seeking advice and asking many questions. The questions asked are varied but the following three are increasingly common.
What will I receive as a redundancy payment from my employer and how do I confirm it is the correct amount?
If a client’s role is made redundant their employer will notify them of the following in writing:
- the reason for the termination
- their notice period and whether they will be paid in lieu of notice
- their last day of work
- details of the employee’s redundancy pay entitlements
- any other entitlements to be paid, such as annual leave and long service leave.
If the employer makes 15 or more positions redundant as a result of economic, technological, structural or similar changes then Centrelink should be notified. Details remitted by the employer to Centrelink include the names, roles and exit dates of affected employees.
Clients will typically be entitled to the following benefits:
- Outstanding salary and wages
- Unused annual and long service leave
- Payment in lieu of notice
- Increases from one to four weeks depending on their years of service. Clients aged 45 and over may be entitled to an extra week see ‘Appendix 1’ for details.
- Redundancy or ‘severance’ amount based on their agreement or award
- If your client was employed for longer than 12 months as either a full time or part time employee, they may be eligible for a redundancy payment of no less than four weeks at their base rate of pay for their ordinary hours of work. See ‘Appendix 2’ for details.
Situations where a client may not be eligible for a redundancy include when they are:
- Employed by a business with fewer than 15 employees
- Hired as an apprentice or trainee
- Hired for a specific period or season
- Employed for less than 12 months
- Dismissed for serious misconduct
See the Fair Work Ombudsman ‘Notice and Redundancy calculator’ to calculate entitlements specific to your client’s industry.
How is my payment taxed and is there anything I can do to reduce this tax?
Definition of genuine redundancy
How unused leave, payments in lieu of notice, and redundancy amounts are taxed depends on whether it is a genuine redundancy under tax law.
Four basic requirements are prescribed for the payment to be taxed as a ‘genuine redundancy payment’ these are:
- The payment is received in consequence of an employee’s termination.
- The employee is dismissed from employment.
- That dismissal must be caused by the redundancy of the employee’s position.
- The redundancy payment must be genuinely made because of a redundancy.
Tax law also imposes an age or a period of service requirement. This requires clients to have been dismissed before the earlier of:
- attaining Age Pension age
- Previously tax law stipulated age 65, but this was recently aligned to Age Pension age. Age Pension age depends on your client’s age and is gradually increasing to age 67
- if the client’s employment would have terminated on attaining a set age or completing a period of service, then before that age or time.
As an example, some professional service partnerships require their partners to retire at a set age. A termination payment received upon attaining that age would not be treated as a genuine redundancy.
In addition, the redundancy must be on an arm’s length basis and there must be no arrangement to rehire the client at the time of dismissal.
Tax-free genuine redundancy limit
There is a limit on how much of the redundancy payment is tax-free. For the 2020/21 financial year the tax-free genuine redundancy amount is limited to $10,989 + $5,496 for each completed year of service. As an example, if someone is employed for 10 years and 3 months, they will have 10 full years of service and therefore their maximum tax-free genuine redundancy amount is $65,949 ($10,989 + (10 x $5,496)). Please note this figure reflects how much of the redundancy will be tax-free. The actual redundancy amount paid may be greater or less than this amount.
Redundancy amounts in excess of the tax-free component are treated as an employment termination payment (ETP). ETPs within the current ETP cap of $215,000, or where applicable, the lower whole of income cap of $180,000 are taxed at concessional rates. Payments above these caps are taxed at the highest marginal rate plus the Medicare Levy (47%). Please see the Strategy Guide Taxation: Termination Payments for more information.
You cannot rollover a redundancy amount into super, however, clients may wish to make a personal contribution and utilise any catch-up concessional contributions if they’re available and the client’s total super balance was less than $500,000 as at 30 June of the previous financial year.
Taxation of unused leave
Unused leave paid in consequence of a genuine redundancy is not taxed in the same way as a genuine redundancy payment. The client will instead be taxed at a maximum rate of 30% on the lump sum paid out leave upon being made genuinely redundant. Please note, the 2% Medicare Levy may also apply.
In some instances, it may be possible to negotiate for a redundancy to be delayed until annual and long service leave is exhausted. The employee would not return to work but might still be ‘on the books’ while taking leave. This might allow the final redundancy payment to be received in a new financial year so the employee could benefit from income splitting across financial years.
Am I entitled to Centrelink benefits and what means test strategies should I consider?
Clients who have been made redundant may be entitled to income support payments such as the JobSeeker Payment or the Age Pension. A redundancy payment to a client who has attained Age Pension age is not taxed as a genuine redundancy, instead, it’s taxed as an eligible termination payment. Unless the client’s employment was terminated shortly before attaining Age Pension age, they will not be eligible for both a genuine redundancy and the Age Pension.
Your clients may be entitled to the JobSeeker Payment on redundancy. The maximum JobSeeker Payment is $574.50 per fortnight for a single person, which includes the $8.80 Energy Supplement. For each member of a couple, the maximum fortnightly payment is $518.70, including the $7.90 energy supplement. The JobSeeker Payment is means tested and is typically subject to both an income and asset test. However, at the time of writing, there is no Asset Test or Liquid Asset Waiting Period. These tests will be reapplied from 25 September 2020. The one-week Ordinary Waiting Period will continue to be waived until 31 December 2020.
The JobSeeker Payment is income tested. Please see JobSeeker Payments for couples for a detailed analysis on how the income test applies to the JobSeeker Payment.
Clients entitled to at least a part JobSeeker Payment are entitled to the full Coronavirus Supplement of $550 per fortnight until 24 September, after which time it reduces to $250 per fortnight from 25 September to 31 December 2020.
Including the Coronavirus supplement of $550 per fortnight, single clients can receive up to $1,124.50 per fortnight while each member of a couple may receive up to $1,068.70 per fortnight up to late September 2020.
From 25 September 2020, the asset test will be reapplied to the JobSeeker Payment. There is no tapered reduction like the Age Pension. It will be necessary to get clients below the lower asset test threshold for them to be eligible for any JobSeeker Payment. For a single client, this lower asset test threshold is currently $268,000 (homeowner) or $482,500 (non-homeowner). For a couple combined it is $401,500 (homeowner) or $616,000 (non-homeowner).
Superannuation (accumulation) is not assessed by Centrelink if your client is below Age Pension age. Contributing to super may assist in getting your client’s assessable assets below the applicable asset test threshold.
Liquid Asset Waiting Period
There is a Liquid Asset Waiting Period (LAWP) of up to 13 weeks. This is typically assessed using liquid assets the day following the client ceased work.
Asset reduction strategies implemented prior to the clients last day at work may reduce the LAWP otherwise payments of non-mortgage related debt, such as a car loan, may assist in reducing the LAWP.
Income Maintenance Period
Lump sum payments paid on termination relating to redundancy and unused leave will result in an Income Maintenance Period (IMP). The IMP reflects the period in which the lump sum relates. If a client is paid a five-week redundancy payment and five weeks of unused annual leave the IMP will be 10 weeks. For the next 10 weeks it will be assumed that the client continues to receive their usual employment income. As a result of the IMP your client will likely be ineligible for the JobSeeker Payment under the income test during this IMP.
As mentioned earlier, it may be possible to negotiate for a redundancy to be delayed until annual and long service leave is exhausted. The employee would not return to work but might still be ‘on the books’ while taking leave. While on leave, clients can continue to take advantage of the ‘Work Bonus’ which disregards up to $300 per fortnight of employment income under the income test. In rare situations, clients may also be able to negotiate stretching out their leave on half pay reducing the impact of employment income under the income test.
Taking leave will reduce the amount of annual leave paid as a lump sum on termination and will result in a shorter IMP.
Clients who have attained Age Pension age can apply for the Age Pension. The maximum age pension, including supplements, for a single client is $944.30 per fortnight. For a member of a couple the maximum Age Pension is $711.80, including supplements.
The lump sum received on termination is not treated as income for the Age Pension and clients will not have to serve an Income Maintenance Period.
Whether the lump sum impacts on entitlements will depend on how it is used. If the lump sum is deposited into a bank account, the money will be subject to the asset test and deemed under the income test. If the money is immediately spent on home renovations, a holiday or contributed into a younger partner’s super fund the lump sum will not be means tested. The younger partner must be below Age Pension age.
Sadly, many clients have been made redundant and this trend may continue a little longer. Understanding the basics around what your clients are entitled to will assist in recommending strategies to help get your clients back on track.
An employer must provide a minimum notice period to employees (excluding casuals) of their last employed day. Alternatively, employers can provide a payment in-lieu of notice.
|Period||Employee's period of continuous service with the employer at the end of the day the notice is given||Notice (weeks)|
|1||1 year or less||1|
|2||More than 1 year – 3 years||2|
|3||More than 3 years – 5 years||3|
|4||More than 5 years||4|
Employees who have attained age 45 and completed two or more years of service are entitled to an additional week of notice.
Under the Fair Work Act employees are entitled to a minimum of 4 weeks after one year of service. The maximum is 16 weeks for 9 years’ service but less than 10 years. Interestingly beyond 9 years entitlements are set at 12 weeks. Employees under an agreement or award may be entitled to more.
|Redundancy pay period||Employee's period of continuous service with the employer on termination||Redundancy pay period|
|1||At least 1 year but less than 2 years||4|
|2||At least 2 year but less than 3 years||6|
|3||At least 3 year but less than 4 years||7|
|4||At least 4 year but less than 5 years||8|
|5||At least 5 year but less than 6 years||10|
|6||At least 6 year but less than 7 years||11|
|7||At least 7 year but less than 8 years||13|
|8||At least 8 year but less than 9 years||14|
|9||At least 9 year but less than 10 years||16|
|10||At least 10 years||12|
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.