Genuine redundancy and early retirement scheme payments you receive are tax free up to a limit based on your years of service with your employer. The tax-free limit is determined by:
Base amount + (service amount x years of service)
The base amount and service amount are indexed annually.
For the tax free limit this year and other years, refer to Tax-free part of genuine redundancy and early retirement scheme payments
For example, for 2015-16 the tax free limit is $9,780 (base amount), plus $4,891 (service amount) multiplied by the years of service. Therefore, for 10 years service, the tax-free limit for year ending 30 June 2016 is:
$9,780 + ($4,891 x 10) = $9,780 + $48,910 = $58,690
The amount over the limit will then form part of your ETP.
Example 7: Genuine redundancy
Sonya is a 54-year-old chief financial officer (CFO) who has been working for Green Waste for 10 years. In 2015–16, 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 for the year 2015–16 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 $140,000 is subject to the ETP cap and not the whole-of-income cap. The tax-free part of the payment is $58,690, based on 10 years service, and $81,310 is taxed concessionally because it is under the ETP cap.
The lesser of the ETP cap or whole-of-income cap will apply 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 rate of 49%.
Example 8: Not a genuine redundancy
Marcia works for a government department and negotiates with her employer to receive a voluntary redundancy (that is, an ETP) of $82,000 in February 2016. At that time, Marcia had also earned salary and wage income of $57,000.
Marcia’s payment is not a genuine redundancy payment because her position is not abolished – the role will continue within the organisation and be performed by someone else.
Because Marcia’s ETP is not a genuine redundancy – that is, not an excluded payment – the lesser of the whole-of-income cap or ETP cap will be applied to her payment. Her calculated whole-of-income cap is $123,000 – that is, $180,000 minus $57,000. Because the whole-of-income cap is lower than the ETP cap ($195,000 for 2015–16), it will be used to determine the amount to withhold.
Because Marcia’s ETP of $82,000 is less than the calculated whole-of-income cap of $123,000, the whole $82,000 will receive a concessional tax rate – either 32% or 17%, depending on her age.
End of example
Example 9 Genuine redundancy, tax-free component only
Moira is 42 years of age and started working for EFG Pty Ltd on 1 July 2000. Moira is being made redundant because the company has merged with another company as of 1 July 2015 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 2015/16 is $9,780 and $4,891 for each year of completed service. Moira is entitled to $9,780 + $4,891 x15 (each completed year of service).
Moira is receiving $56,000 redundancy payment and she is entitled to a $83,145 tax free component. The whole of Moira's redundancy payment is tax free therefore she will not receive an ETP payment summary. All of Moira's redundancy payment would appear on her Individual-Non Business payment summary at Lump sum D.
End of example