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  • Redundancy and early retirement

    Genuine redundancy and early retirement scheme payments are tax free up to a limit based on the employee's years of service.

    The tax-free amount is not part of the employee's ETP. It's reported as a lump sum in the employee's PAYG payment summary – individual non-business.

    Any amount over the tax-free limit is part of the employee's ETP.

    On this page:

    Working out and reporting the tax-free amount

    The tax-free limit is:

    Base amount + (service amount × years of service)

    The base amount and service amount are indexed annually.

    For example, for 2018–19 the tax-free limit is equal to $10,399 (base amount), plus $5,200 (service amount) multiplied by the years of service. Therefore, for 10 years service, the tax-free limit for the year ending 30 June 2019 is:

    $10,399 + ($5,200 × 10) = $10,399 + $52,000 = $62,399

    The tax-free component of a genuine redundancy or early retirement scheme payment is shown at lump sum D on the employee's PAYG payment summary – individual non-business.

    See also:

    Example: Genuine redundancy, tax-free component only

    Moira is 42 and started working for EFG Pty Ltd on 1 July 2001. Moira is being made redundant because the company has merged with another company as of 15 August 2018 and Moira's role is no longer needed. Moira is being paid 2 weeks for each year of service and her weekly earnings are $2,000. Because Moira is receiving a genuine redundancy she is entitled to the tax-free component. The tax-free limit for Moira is $10,399 + ($5,20 × 17) (each completed year of service).

    Moira received $64,000 in redundancy payment and she is entitled to an $98,799 tax-free component. The whole of Moira's redundancy payment is tax free, so she won't receive an ETP payment summary. All of Moira's redundancy payment will appear on her individual non-business payment summary at lump sum D.

    End of example

     

    Example: Genuine redundancy

    Sonya is a 54-year-old chief financial officer (CFO) who has been working for Green Waste for 10 years. In 2018–19, Green Waste is taken over by a larger company, which already has a CFO. Sonya’s position is no longer needed and her employment is terminated. She accepts a redundancy and is paid $190,000, $140,000 of which she would not have received if she had not been redundant. Her other taxable income in 2018–19 is $200,000.

    Sonya’s payment is a genuine redundancy payment because her position is no longer required, even though the position of CFO still exists – the position does not need to be filled by two people.

    The genuine redundancy part of Sonya’s payment is $140,000. The tax-free part of the payment is $62,399, based on 10 years service. The remaining $77,601 is subject to the ETP cap (not the whole-of-income cap) and is taxed concessionally because it is under the ETP cap.

    The lesser of the ETP cap and whole-of-income cap applies to the remaining $50,000.

    Because Sonya has earned $200,000 other taxable income, her calculated whole-of-income cap is zero and is the lower cap. As a result, Sonya’s ETP amount of $50,000 will not receive concessional tax rates and withholding will be at the highest tax rate (47% in 2018–19).

    End of example

    Redundancy

    Only a payment for a genuine redundancy is eligible for the tax-free limit. A genuine redundancy occurs when the employee's job is abolished – that is, the employer has made a decision that the job no longer exists, and the employee's employment is to be terminated.

    A payment for a non-genuine redundancy is taxed as part of the employee's ETP.

    A non-genuine redundancy occurs when the employee:

    • is dismissed because they've reached normal retirement age
    • leaves voluntarily
    • has their contract terminated
    • is dismissed for disciplinary or inefficiency reasons.

    See also:

    • Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments

    Dismissal

    Dismissal is the involuntary termination of an employee. It's the employer's decision that the employment will end, rather than the employee's decision to leave.

    Provided that it's ultimately the employer's decision to cease employment, a dismissal can still occur when the employer offers a redundancy package to an employee to either:

    • minimise disruption to other employees
    • comply with industrial relations laws or a workplace agreement.

    A redundancy is still considered genuine if the employer seeks expressions of interest from their employees before they decide which employee to dismiss.

    Sometimes an employer places an employee in a position where there is little choice but to resign – for example, when the employer offers their employee any of the following:

    • the choice between a package and another job that is different to their qualifications and experience
    • a reduction in their pay
    • dismissal without the benefits of a package.

    In these situations the dismissal is generally not a genuine redundancy.

    See also:

    • Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments

    Early retirement scheme

    An early retirement scheme is a plan that offers employees incentives to retire early or resign when the employer is rationalising or reorganising their business operations.

    The scheme must meet certain conditions and be approved by us. Approval will be provided to the employer as a class ruling. You can't start an early retirement scheme until you have the class ruling.

    An early retirement scheme will generally be approved when it meets the following conditions:

    • It is available to broad groups of employees, such as all employees    
      • hired by the organisation
      • who have reached a particular age
      • with a particular occupational skill.
       
    • It is part of a plan to reorganise business operations. You must be able to show that you are implementing the scheme to achieve a specific short-term objective. A specific objective may include    
      • replacing employees with particular skills with employees who have different skills
      • the closure, relocation or reduction in output of part of the business operations
      • the introduction of new technology, processes, systems or productivity increases.
       

    Your request should be in writing and include:

    • the date of effect (ie the proposed timeline of the scheme)
    • the employer's name and contact details
    • a full and accurate description of the scheme
    • a clear and accurate description of the class of persons subject to the scheme
    • any supporting documents.

    The request can be faxed to 1300 669 846 or mailed to

    Australian Taxation Office
    PO Box 3100
    Penrith  NSW  2740

    See also:

      Last modified: 25 Jun 2018QC 26218