Do you pay tax on redundancy payments & accrued leave?

Do you pay tax on redundancy payments & accrued leave?

Due to COVID-19, many businesses have suffered tremendously and have been forced to make difficult decisions regarding retaining employees. According to the ABS (2020), unemployment rates in Queensland jumped from 5.7% to 6.8% in less than one month. If you have recently been made redundant, or you know somebody who has, it is important to know your rights and understand what sort of tax on redundancy payments you might expect to pay. 

Redundancy payments

If you were dismissed by your employer on the grounds of reaching retirement age, pension age or due to inefficiency issues, your redundancy is considered non-genuine.

Payments for non-genuine redundancies are taxed as part of your employment termination payments (ETP) and are often taxed at a lesser rate unless it exceeds certain caps. 

If your redundancy was a genuine redundancy, meaning you were dismissed by your employer on the grounds of your position no longer being viable, then you will be entitled to a redundancy payment.

Depending on your employment contract and whether your redundancy was genuine or non-genuine, you should receive payments for:

• Payment in lieu of notice
• Severance payments
• A ‘golden handshake’ payment

Upon dismissal, you should also receive payments for unused annual leave or long service leave.

To determine whether these payments attract tax, you’ll need to understand your redundancy tax rate.

Redundancy tax rate

The redundancy tax rate is dependent on the type and amount of the payment. Depending on the payments owed to you, your payments may be considered:

• Tax-free
• Concessionally taxed (lesser than your usual tax rate)
• Taxed at your usual tax rate

The tax you may be required to pay on your employee termination payments is dependent on your employment circumstances and agreements with your employer.

Your accrued leave payout is completely dependent on the termination type, date of accrual and type of leave you have owing.

If you require assistance to help you better understand what you will be required to pay tax on, you should speak to a professional like the team at Simmons Livingstone & Associates. 

Are redundancy payments tax-free?

If your redundancy was considered genuine, you should receive your genuine redundancy payment tax-free up to a limit.

The base tax-free limit for income year 2020 – 2021 is $10,989. Then an additional $5,496 for every year of completed service.

If your payment exceeds the tax-free limit, you will be required to pay concessional tax or marginal tax.

What does this mean for businesses?

As an employer, you must administer a payment summary within 14 days of making the termination payments. 

The general rule is that redundancy payment amounts are tax-free but only up to a limit. If that limit is exceeded, it will be taxed as an employment termination payment (ETP). 

To determine what payments should be taxed, you should consult your workplace agreement.

Unused accrued leave and long service leave are subject to different rates of tax which should also be outlined in your workplace agreement.

Small Business Redundancy

Most small businesses are not required to pay redundancy payments. However, to do so, you will need to be considered a small business in the eyes of the ATO.

A business is considered a small business if they employ less than 15 employees (including the employee(s) being made redundant).

To find out more, you should consult the industry award your company adheres to, as some awards will require you pay redundancy to employees.

Who does not receive redundancy payments?

Employees that fall under these criteria do not receive redundancy payouts:

• Contract employees or employees hired for a specified time, season or task/ project,
• Employees who work on a casual basis,
• Employees whose consecutive amount of service is less than 12 months,
• Apprentices, or
• Employees who are let go due to serious misconduct.

For more information

If you have recently been made redundant, help is here to guide you through what the tax on redundancy payments are depending on your payout as well as whether some of your payments will be tax-free.

The friendly team at Simmons Livingstone & Associated are only a phone call away. Contact us today and let’s get your redundancy payments sorted.

Learn more about Simmons Livingstone Tax Services for Individuals, Companies & Trusts, Sole Traders & Partnerships.