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By Janet Manzanero- Caruana, Senior Technical Manager
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-191. While the Government extended temporary economic assistance for most businesses until March 2021, its gradual phase out may result in many businesses downsizing, winding up or becoming bankrupt. This means it’s possible that more jobs may be lost in the coming months.
Redundancy is a significant event that may impact on a person’s career, family, mental health and financial wellbeing. For those who are ready to retire, termination payments are likely to be a welcome windfall. Those who don’t have retirement on the near horizon may find redundancy stressful, as it tends to happen during a downturn when it may be harder to find a new job.
The immediate issue clients need to address when they’re made redundant is whether there’s enough money to tide things over until the next job comes along.
To achieve the best outcome for a client who has been made redundant, the following issues need to be considered:
This is a great opportunity to make a real difference to your client’s situation during a challenging time, and, if your client is the employer, you may be able to support them to achieve a better outcome for their employees.
1 Source: Labour Account Australia
Payments on termination due to redundancy attract more generous tax concessions than if the employee resigns.
A GRP must satisfy the following conditions:
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 that may be received by an employee who is made redundant include:
Payments on termination are categorised to determine how they are taxed. A client can plan ahead by asking their employer for an estimate of the payments they will receive including withholding tax amounts. They will be provided with an income statement at termination or they may also obtain this from the Australian Taxation Office (ATO).
The employer withholds tax from payments but the tax is not a final tax because taxable payments are included in the client’s assessable income which may be reduced by allowable deductions.
Payments eligible for concessional tax treatment attract tax offsets so that the tax paid does not exceed the concessional tax rate. Tax withheld by the employer reduces the final tax payable and if too much tax was withheld the excess is refunded to the employee.
The following is a guide to classifying payments and estimating the amount of tax payable:
Step 1 – Identify payments for earned income
Set aside earned income such as salary, wages, overtime pay, bonuses and allowances. These payments do not attract tax concessions and are taxed at the employee’s marginal tax rate after allowable deductions.
Step 2 – Calculate tax on unused annual or long service leave
Identify unused annual and long service leave. The tax on these payments is capped at lower rates when the termination is a genuine redundancy.
1 Medicare levy and Medicare levy surcharge may be payable.
Step 3 – Work out the non-excluded employment termination payment (ETP), the tax-free genuine redundancy payment (GRP) and the excluded ETP
The remaining payments may comprise of the ETP and the tax-free GRP. What determines each category is outlined below:
1. Non-excluded ETP
Segregate amounts that would ordinarily be paid under the employment contract or relevant award if the employee voluntarily resigned (code O or P in the PAYG Payment Summary - ETP).
These payments are not excluded from the whole-of-income (WOI) cap.
After segregating non-excluded ETPs, the remaining payments are GRP.Calculate the tax-free GRP limit. GRP up to this limit is not an ETP. It is tax-free and not reported in the employee’s tax return. The tax-free GRP limit is calculated as:
Base amount* + (service amount* X years of service)
For 2020/21 this is:
*The base amount and service amount is indexed annually.
The GRP may be less than, equal to or more than the tax-free GRP limit. Where GRP is less than or equal to the tax-free GRP limit, there is no excluded ETP.
3. Excluded ETP
The excluded ETP is any GRP that exceeds the tax-free GRP limit (code R in the income statement). Excluded ETPs are excluded from the WOI cap.
The diagram illustrates the categories:
Step 4 - Apply the relevant caps for excluded and non-excluded ETPs
The taxable component of ETPs are concessionally taxed up to certain limits, called 'caps'. There are two caps:
Excluded ETPs are deemed to be received first and are subject to the lesser of the:
Non-excluded ETPs are subject to the lesser of the:
The WOI cap generally applies to non-excluded ETPs (payments unrelated to redundancy) where it is substantially reduced by the employee’s other taxable income in the financial year payments are received. Total ETPs may not utilise the maximum ETP cap where the WOI cap applies, as shown in this diagram:
The maximum tax rate applicable to the taxable component of ETPs within the caps depends on the client’s age at the end of the financial year.
This table shows the maximum tax rates for ETPs:
Age at 30 June in a payment year
Under preservation age
Within ETP cap and/or WOI cap
Amount exceeding cap
Up to 30
Preservation age or above
Up to 15
ETPs must be paid within 12 months of termination or payments are taxed at the person’s marginal tax rate. ETPs for the same termination may be paid in instalments. The employer may consider the impact of paying an ETP by instalments on their own financial and tax position.
Deferring ETP payments to the next financial year may benefit from the indexation of the ETP cap.
Gail was made redundant in 2019/20. She is entitled to:
Her other taxable income averages $130,000 pa including the next financial year.
The excluded ETP reduces the ETP cap ($210,000 in FY 2019-20) to $20,000 ($210,000 - $190,000).
The non-excluded ETP is subject to the lesser of the:
The ETP cap increases from $210,000 to $215,000 in 2020/21. If a non-excluded ETP is paid in 2020/21 an additional $5,000 may fall within the ETP cap.
The 12-month period may be extended where the:
Frank is aged 65 (he will be Age Pension age on 15 January 2021). He started working for REFCO on 2 January 2012. He earns $130,000 pa as a base salary plus superannuation. REFCO’s turnover is reduced by half because of the impact of COVID-19 and Frank is notified by his employer that his position will be made redundant on 31 December 2020. The table below shows two scenarios for Frank:
Scenario 1: estimated current position.
Scenario 2: position when:
Assuming Frank is not expecting any other income in the 2020/21 financial year, the following table outlines scenario 1 and 2.
1 Non-excluded ETP subject to the lower of:Unused ETP cap = $215,000 - $35,043 = $179,957WOI cap = $180,000 – $122,661* = $57,339* ($75,161 + $48,000 + $17,500 + $5,000) - $23,000 deductions
2 Excluded ETP subject to the ETP cap
3 Tax-free GRP = $10,989 + ($5,496 × years of service)
4 Salary, bonuses, overtime, investment income after deductions taxed at marginal tax rates
5 Tax offsets limit tax to concessional tax rate
6 $500 increase for one working day
7 $25,000 – (9.5% x $75,661)
Scenario 2 saves $10,553.20 in tax ($49,178 - $35,953 - $2,672 contributions tax) because:
If Frank’s redundancy happens on or after he attains Age Pension age, genuine redundancy requirements won’t be met. The tax-free GRP becomes an excluded ETP and leave payments will be taxed at Frank’s marginal tax rate.
Some planning considerations for your client:
Clients who are less than Age Pension age may apply for the JobSeeker Payment but are subject to the liquid assets waiting period (LAWP) and income maintenance period (IMP) which run concurrently. The maximum LAWP is 13 weeks. As a rule of thumb, the IMP can be estimated as:
Total of termination and lump sum leave paymentsRelevant weekly wage
The IMP may result in the client receiving a reduced or no JobSeeker Payment during that period.
The LAWP and IMP does not apply to the Age Pension. However, payments left unspent are assessed for the pension means test. Superannuation contributions to a spouse who is under Age Pension age may be considered.
Family Tax Benefits may also be impacted by a change in the client’s adjusted taxable income.
A redundancy also terminates other employee entitlements such as:
Superannuation may need to be consolidated or transferred in cases such as when the employee is a member of a corporate super fund.
If an employer becomes bankrupt, employees who are Australian citizens, permanent residents or special category visa holders may apply under the Government’s Fair Entitlements Guarantee (FEG) for certain entitlements not paid to them including unpaid wages, unpaid annual and long service leave, payments in lieu of notice and redundancy paid up to certain limits.
A redundancy may be beneficial for clients who are ready to retire but stressful for those who 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 for the employee. Your role is key in considering both the impact of a redundancy on a client’s overall financial situation and in achieving the best payment outcome.
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.
DisclaimerThe 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.