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NEWS - PLANNING
Planning for redundancy
3/11/2002
Being made redundant or pressured into early retirement rank high on the stress scale, on par with a major illness or injury and serious marriage problems. It's even worse when the loss comes emotion-charged, such as the very public collapse of Ansett Airlines. Adding to the emotions of shock, loss and helplessness are the tax and superannuation repercussions linked to redundancy.
Having to deal with potentially complex tax and financial matters is probably the last thing people need when they feel vulnerable and stressed, acknowledges Noelle Kelleher, a superannuation adviser with accountancy firm Ernst & Young in Melbourne.
Redundancy can be extra difficult because most are unprepared for it, unlike those who have organised a smooth transition to retirement.
It takes time and planning to take charge of your finances and enable such a smooth transition. But taking charge of your finances can be the first step towards regaining any self-esteem lost through redundancy.
One way of achieving this is through a crash course in redundancy finances. This means being aware of the tax and super rules that apply to the payments you may receive. If you understand these, says Kelleher, you can play an informed and guiding role in organising your finances. From there you can plan according to the alternatives available.
For those with significant superannuation, the redundancy management process can be divided in two: dealing with non-super payments and super payments.
Non-super payments are important because the bulk of these will generally be money available to meet your immediate financial needs. Such payments may include any unused annual leave, any long service leave entitlement, payments in lieu of proper notice and redundancy payments.
Each of these has special tax treatment and they can be complicated because rules have changed over the years and reduced entitlements.
To avoid penalising anyone who may have lost something because of a change, an entitlement to the old rules remains up to the time of the change.
For example, with long service leave entitlements, there was a major change from August 15, 1978. Before this date, the tax treatment of unused long service was quite concessional: just 5 per cent of the leave payment amount was added to your taxable income and then taxed at your personal tax rate. In other words, the tax rate on long service leave for taxpayers on the highest rates in the 1970s was about 3 per cent.
Such leave entitlements that accrued after August 1978 are now taxed at no more than 31.5 per cent when paid as part of a redundancy package.
There is a similar tax rate on unused annual leave paid out as part of redundancy. The 31.5 per cent levied on annual leave is a concession for redundancy situations that harks back to August 18, 1993. That's when annual leave rules were changed to tax unused leave at normal personal tax rates in non-redundancy circumstances.
For most people, the major portion of a redundancy package comprises special payments that are usually determined by an industrial award or employment contract. The big consideration with such payments is the portion that is allowed tax-free.
A system of allowing a major part of a redundancy or early retirement payment to be received tax-free is a concession that goes back to 1994-95. The tax-free portion is calculated according to a formula with a base amount and an amount for each year of completed service that are increased annually by wage inflation.
For the 2001-02 financial year, the base amount is $5,295 and the per year of completed service amount is $2,648. So someone with 29 years with an employer will be entitled to $82,087 tax-free ($5,295 plus 29 times $2,648).
Where a redundancy payment exceeds this tax-free entitlement, the tax rules that apply to this excess look very much like the rules that deal with superannuation benefits and these will be explored in another column.
A redundancy payment over and above the tax-free amount is like receiving a golden handshake from an employer. This has potentially far-reaching tax consequences that anyone who is made redundant must understand, as they can have a considerable impact on retirement entitlements.
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