The payout: what you’re really entitled to in a redundancy

The days of a big cash payouts for redundancy may be over, but if you think your job is about to disappear, you may be entitled to a redundancy package based on your age and years of employment. 

But Noni Crawford, financial advisor and director of Hello Wealth warns that it’s not as simple as a generous lump sum appearing in your bank account and it’s important to double check your entitlements. 

If your redundancy is genuine, meaning your employer has requested it, you may be entitled to a tax-free amount of your redundancy payment.

This tax-free component requires you to meet certain eligibility criteria but in 20/21, it could provide a maximum benefit of $10,989 plus $5,496 for every completed year of service.

Any amount of the redundancy payment in excess of that tax-free amount will be considered an employment termination payment (ETP). Broadly, an ETP is a lump cash payment within twelve months, made directly by an employer in consequence of the termination of an employee’s employment. 

If you started your employment before 1983, this component is also received tax-free and is not included in assessable income. In most cases, ETPs for jobs started after 1983 have different tax amounts depending if you are under or over ‘preservation age’, which is between 55 and 67 depending on your year of birth.

Depending on the redundancy package received, in 20/21 the ETP tax assessment is based on the first $215,000 depending on the classification of your payment.

If you receive an ETP in the financial year in which you will be preservation age or older as at 30 June, you will pay a maximum of 15 per cent plus Medicare levy on the taxable component of the ETP. If you receive an ETP in a financial year in which you have not yet reached preservation age at 30 June, you will pay a maximum of 30 per cent plus Medicare levy on the taxable component.

Ms Crawford also shares a few tips for getting the most out of your redundancy package. To start, she says that there are several different elements that you may be up for.

“Along with any redundancy payment, employees may also be entitled to any unused annual leave and long service leave. Sometimes, other payments such as unused sick leave or a payment in lieu of notice may also be received.”

If your employer is flexible, Ms Crawford suggests adjusting the official termination date.

“If a client’s redundancy date is close to their employment anniversary, consider whether it is possible to defer the termination until on or after the anniversary,” she says. “This will increase the tax-free amount of the redundancy payment, which is based on completed years of employment.”

Once the money is in your account, there are other ways to make the most of it and reduce the taxable amount. 

“People who terminate their employment and receive taxable payments (even those subject to maximum rates) could benefit from making a personal ‘deductible’ superannuation contribution to reduce their taxable income and marginal rate of tax,” she says. 

She adds that both the reason for the termination and any termination payments received can impact your eligibility for Centrelink benefits. 

“For example, an individual hoping to qualify for, say, Newstart Allowance or the Disability Support Pension may have to serve a number of waiting periods,” she warns. “Further, where the proceeds from a termination payment are invested may also have an impact on the amount (if any) of Centrelink benefits available.”