Redundancy Payment

What is a Redundancy Payment?

A redundancy payment, also known as severance pay, may occur if your employer decides your role no longer exists and your employment is to be terminated. These employment termination payments that meet the ‘genuine redundancy’ definition are entitled to concessional tax treatment.

Your employer must give you a payment summary within 14 days of giving your termination payment. This summary shows the amount paid and the amount of tax withheld.

In your termination payment, unused leave entitlements and an extra ‘redundancy’ amount, which can be determined according to the terms of your employment contract, may be included.

The redundancy amount is tax-free up to a certain limit, with the excess taxed as employment termination payment (ETP).

Unused Leave Entitlements

Any payments for long service leave and unused annual leave are included in your assessable income summary and impact your entitlements to certain tax offsets, benefits or other liabilities. 

The ATO has an offset system to ensure the rate paid on unused leave payments is limited to the rates shown in the following table:

Genuine redundancy tax free amount

A portion of your genuine redundancy amount is tax-free if you are 65 years old (or under the retirement age specified in your employment award) during the date of termination. The tax-free amount depends on the years of completed service with the employer. For the years 2020/21, the tax-free amount for genuine redundancy payment is calculated via the following formula:

$10 989 + ($5 486 x each year of completed service)

If your redundancy payment is less than the result in this formula, then it will be tax-free and you will only have to pay tax on the leave payments.

For more information on how we can help you if you have been made redundant, contact Wagtail Wealth today. 

IMPORTANT NOTE: This information is general advice only and does not take into account your personal circumstances, goals and objectives. Therefore, you should consider its appropriateness for your circumstances before acting on this information.

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