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A redundancy can be genuine or non-genuine.
A genuine redundancy payment is a payment you receive because the job you were doing is abolished. That is, your employer has made a decision that the job you are doing no longer exists and your employment is to be terminated.
A genuine redundancy has a special tax treatment under the tax law where an amount paid up to a limit is tax free. If your redundancy does not meet the definition of genuine redundancy then it will be taxed under the normal ETP rules definition.
A genuine redundancy does not occur when:
Further Reading: For more information about the meaning of genuine redundancy, refer to Taxation Ruling TR 2009/2 Income tax: genuine redundancy payments.
Genuine redundancy 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 year ended 30 June 2017, the tax-free limit is $9,936 (base amount), plus $4,969 (service amount) multiplied by the years of service.
For example, for 10 years service, the tax-free limit is:
$9,936 + ($4,969 x 10) = $9,936 + $49,690
= $59,626
The amount more than 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 ten years. In 2016-2017, 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. Sonya accepts a redundancy and is paid $190,000, $140,000 of which she would not have received if she had not been redundant. Sonya's other taxable income for the year 2016-2017 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 $59,626, based on 10 years service, and $80,374 is taxed concessionally as it is under the ETP cap.
The lesser of the ETP cap or whole-of-income cap will apply to the remaining $50,000. As 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 will be taxed at the highest marginal tax rate of 49%.
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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.
As Marcia's ETP is not a genuine redundancy, the lesser of the whole-of-income cap or ETP cap will be applied to Marcia's payment. Marcia's calculated whole-of-income cap is $123,000 (that is, $180,000 - $57,000). As this amount is lower than the ETP cap, it will be used to determine the amount to withhold. However, as 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, which is either 32% or 17% depending on her age.
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Topic: 40909
