Bona fide redundancy payments and approved early retirement scheme payments
From 1 July 2007 there will be major reforms to simplify the superannuation system. Due to these reforms, the information in this product may change. Updated information about superannuation will be available from this website progressively.
A bona fide redundancy payment is a payment made to an employee who is dismissed because the job they were doing is made redundant.
An approved early retirement scheme is a scheme that an employer puts into place to encourage certain groups of employees to retire early or resign. To get the special tax rates, the Commissioner of Taxation must approve the scheme.
A redundancy is genuine when the employer dismisses an employee because the job the employee was doing is redundant. The redundant job may be work of a particular kind, either generally or in a particular location. The employer does not need approval from the Commissioner of Taxation to make this type of payment. The employees will receive tax benefits for payments made because of a genuine (bona fide) redundancy.
A bona fide redundancy occurs when the:
employer has made a definite decision that the job of an employee ceases to exist
decision is not due to the ordinary and customary turnover of labour
decision led to the termination of the employee’s employment, and
termination is not on account of any personal act or default of the employee, or caused by any consideration peculiar to the employee, or is for personal or disciplinary reasons.
A bona fide redundancy does not occur when the:
dismissed employee reaches normal retirement age
employee was not dismissed but left voluntarily
another employee of similar age or skills replaced your employee soon after
employee was dismissed for disciplinary reasons, or
An approved early retirement scheme is a scheme approved by the Commissioner of Taxation providing for early retirement of a specified class of employees with a view to rationalising or reorganising the operations of the employer.
A payment under such a scheme is an approved early retirement scheme payment to the extent that it exceeds the amount that could reasonably be expected to have been received if the employee had voluntarily retired at the same time.
Early retirement schemes will generally be approved when they meet three conditions the:
scheme is available to broad groups of employees
scheme is to be implemented with a view to reorganising the employer's business operations, and
employer applies to the Commissioner of Taxation for approval of their scheme before making any payment.
Any payments which are employer eligible termination payments (ETPs) and meet the conditions for payments under a bona fide redundancy or approved early retirement scheme are tax free up to a limit based on the number of years the employee has worked for their employer. The tax-free limit is a flat dollar amount plus an amount for each year of completed service in the employee’s period of employment with their employer. Indexation changes the tax-free limit on 1 July each year.
The amount paid up to the tax-free limit is not an ETP. The employee does not show the tax-free amount on their tax return. If the payment is more than the tax-free limit, the amount over the limit is an ETP. Special tax benefits also apply to the ETP part of the payment.
Before a payment is tax free up to the limit, your employer ETP needs to meet all of these conditions:
the payment is more than the amount the employer would have paid to the employee, if the employee voluntarily resigned or retired in other circumstances
the termination of employment is before the employee turns 65 and earlier than the date the employee would have left their employment anyway
the employer does not have any agreement with another person to re-employ the employee
if the employer is related to the employee in some way, the payment is not more than it would have been if the employer and the employee were not related (known in tax law as dealing with each other at ‘arm’s length’)
if the payment is an early retirement scheme payment, the Commissioner of Taxation has approved the early retirement scheme, and
if the payment is a redundancy payment, the redundancy is genuine.
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