Dealing with redundancy

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When an employer decides to downsize, the staff affected may be entitled to a number of payments. Often these are set out in an award or agreement, or an employment contract. Where a person ceases to be employed, they will be entitled to their wages or salary for work completed up to the time they cease to be employed. In addition, they may be entitled to payment for any unused rostered days off (RDOs) and any accumulated leave they have not taken, be it annual leave and/or long service leave. Payment for unused
sick/personal leave does not generally form part of a payment to terminated employees although some employers may offer this.

Awards, agreements and employment contracts may also make provision for the payment of a lump sum on termination of employment as a result of genuine redundancy or an approved early retirement scheme. These payments may be referred to as ‘severance payments’ and are often expressed by way of a formula such as ‘x’ weeks pay for each year of service. In some circumstances the maximum amount that can be paid on this basis may be capped.

Let’s look at a simple example. Bryan has worked with his current employer for the past 15 years. At the time of being made redundant, he was in receipt of a gross salary of $1,200 per week. He had accumulated six weeks annual leave and a remaining long service leave entitlement of ten weeks. Under the terms of his employment contract, both he and his employer are required to give four weeks’ notice in the event that either wishes to terminate the employment contract.

In addition to the accumulated leave, Bryan’s employment contract provides for two weeks’ severance pay to be paid for every year of service in the event of genuine redundancy.
In summary, on being made redundant, Bryan will be entitled to the following payments:

Accrued annual leave (6 weeks x $1,200) $ 7,200
Accrued long service leave (10 weeks x $1,200) $12,000
Payment in lieu of notice (4 weeks x $1,200) (Where the employee is not required to work out the notice period) $ 4,800
Severance pay (2 weeks x $1,200 x 15years) $36,000
Total $60,000

Where a payment such as the example mentioned for Bryan is made, special taxation treatment applies. In other words, the redundancy payment is not simply included as assessable income and taxed at Bryan’s marginal tax rate. In Bryan’s case, the accrued annual leave and long service leave will be included as part of his assessable income but tax will be limited to a maximum rate of 30% (plus Medicare Levy, and Medicare Surcharge if applicable).

(Source Professional Investment Services Timely Tips Nov. 2008)

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