Redundancy and early retirement involve important financial decisions that can only be made with consideration of an individual’s circumstances.
This page provides a reference for employees facing the prospect of redundancy, retrenchment or other terminations of employment and identifies some of the issues that need to be considered. However, it is highly recommended that you consult us to assess your particular circumstances.
You may leave your employment for a variety of reasons. You may leave to take another job or to retire, you may be made redundant or you may be offered early retirement.
In some instances, employees may be offered a lump sum payment when they leave voluntarily, perhaps to encourage them to leave or perhaps in recognition of many years of loyal and valuable service. Such a payment is commonly known as a ‘golden handshake’ and may be subject to special taxation rules.
Payments made to employees under an ‘early retirement scheme’ or as a ‘genuine redundancy’ generally qualify for concessional tax treatment as the employee is considered to have been dismissed through no cause of their own. This may apply even when the scheme is offered to employees as part of a voluntary package.
Genuine redundancy payments
These payments are made when your job is made redundant and will generally qualify for concessional taxation treatment. The concept of redundancy primarily refers to the job ceasing rather than you losing your job for other reasons. If the tasks that you perform are no longer required, or are required in a different form or at a different location, then your position can reasonably be termed ‘redundant’. To receive a concessionally taxed genuine redundancy payment, certain conditions have to be met. Broadly, these are:
• you must be dismissed from your job before your normal retirement date;
• your job has been made redundant;
• you must be under 65 or the normal retirement age for your position (whichever is the earlier); and
• at the time of termination, there must be no agreement between you and your employer for reemployment at a later date.
Early retirement schemes
Early retirement schemes are implemented by the employer and must be submitted to the Australian Taxation Office (ATO ) to be approved on a case by case basis. Primarily, the conditions required for classification as an early retirement scheme are:
• the scheme must be offered to all employees in the same class identified by the employer;
• it must be implemented with a view to rationalising and/or re-organising the employer’s operations; and
• it must be approved by the Commissioner of Taxation before retirement occurs.
Whilst these schemes must apply to all employees in a particular category (eg all with a particular job skill or of a particular age), a scheme may be targeted narrowly such that only a small number of employees, perhaps just one, is offered early retirement. Essentially, it does not matter whether your cessation of employment is due to a genuine redundancy or an early retirement scheme as they each lead to the same tax and social security treatment of the benefit paid. Your employer will tell you if either of these apply to you.
Maximum Wealth Strategies can clarify the special taxation treatment relating to a redundancy package whilst also providing knowledge covering Centrelink and associated issues.
To find out more, or to make an appointment, simply call Maximum Wealth Strategies on 02 60562229 or contact us.