When an employee leaves a business, the payment a business is required to make, along with the tax rate, depends on the nature of the employee’s dismissal (“redundancy”). There are two types of redundancies when an employee leaves a business:
- genuine redundancy
- non-genuine redundancy
A genuine redundancy is when a business makes a conscious decision that a specific job no longer exists, and therefore the employee who was working in that job is dismissed. The most common reason for these decisions is when the business needs to restructure a department or office to a configuration that is seen to be more effective in reaching the business goals and objectives.
A non-genuine redundancy occurs when an employee leaves a business voluntarily; has finished their contract; is dismissed for disciplinary or inefficiency reasons; or has reached retirement age when dismissed.
What payments need to be made to the employee?
An employee that is dismissed as part of a genuine redundancy can be paid several types of ‘lump sums’ that are taxed and reported differently to normal income. A lump sum is a one-time payment, usually provided to the employee, instead of recurring payments over a period of time. An employment termination payment (ETP) is one of these lump sums.
An ETP may include a payment in lieu of the notice period and a severance payment of a number of weeks’ pay for each year of service. The severance payment is dependent on the industry the business works in and the industrial instrument that applies. The employee may also receive payments for unused rostered days off and unused sick leave, amongst other payments. For more information visit FairWork Ombudsman.
A genuine redundancy payment is:
- tax-free up to a limit based on an employee’s number of years of service (not including any unused leave or allowances owing to the employee)
- taxed at a lower rate than an employee’s normal income for amounts over the tax-free limit
- taxed at the employee’s usual marginal tax rate for amounts above certain caps
A non-genuine redundancy payment includes unused annual leave or unused long service leave which may be concessionally taxed dependant on the type of termination, date of accrual and type of leave, or a marginal tax rate calculation may apply.
Genuine redundancy and early retirement scheme
In October 2019 the age at which employees can access concessional tax treatment for genuine redundancy and early retirement scheme payments was extended from the age-based limit of 65 years to pension age. Employees that are dismissed and over the pension age will now receive a larger tax concession as part of their genuine redundancy.
Businesses who made a genuine redundancy payment on or after 1 July 2019 may have withheld more tax than required under the new law for their employee. If this is the case, a revision of the payment can be made and a refund can be provided to the employee. Amendments can be made either via Single Touch Payroll or PAYG withholding payment summary.
Talk to your bookkeeper for assistance on redundancy payments and amendments.
Talk to us for assistance with redundancy payouts.