The restructure of a business may lead to a reduction in staff numbers and redundancies. If you are effected you may experience a range of emotions from shock and anger to relief and hope.
Whilst a redundancy may provide you with a substantial financial windfall if you have been a long term employee, careful consideration should be given to how best to use the redundancy payments to protect your future.
It is important to understand the payments you are receiving, the tax implications and the choices available to you. Payments received as part of a genuine redundancy program can be concessionally taxed to help your money last longer.
When you cease employment the lump sum paid by your employer may comprise a number of payments. The first step is to identify which parts are included in the definition of an employment termination payment and which are not.
The next step is to calculate the tax on each payment so you can determine the net amount remaining after tax.
If you receive an employer payment under a genuine redundancy or approved early retirement scheme, part of the payment may be tax-free based on the number of years with that employer.
For 2014/15 the tax-free amount is: $9,514 + [$4,758 x each completed year of employment]
Amounts above this are taxable. For amounts up to $185,000 the tax deducted depends on your age; under preservation age 30% plus medicare levy, over preservation age 15% plus medicare levy. Amounts over $185,000 are taxed at 47%.
Unused annual leave and long service leave are payable on top of an employment termination payment, but may still receive concessional tax treatment if received due to redundancy or approved early retirement.
The payments are included in your assessable income but the tax is capped at 30% plus medicare. However, as they are included in assessable income they may impact your entitlements to other tax offsets or benefits.
Facing a redundancy is challenging, and it is important to understand your entitlements and get advice on what it means to you and your Family, and to work with your Advisor to consider alternative startegies that suit you best.
This is a specialist area, consult with a Certified Financial Planner who is also a member of the Financial Planning Association.
This article is general in nature only and does not constitute or convey specific or professional advice. Formal advice tailored to your specific circumstances should be sought before acting in any of the areas discussed.