Redundancy Termination Payments

With the end of JobMaker, we may see an increase in redundancy and other termination payments.

If you are involved in processing payroll, you may need to check the circumstances of any terminations after 28 March, especially if the employer is a large employer with 15 or more employees, in case they are trying to avoid paying redundancy payments at termination.

The ATO is alert to the possibility of employers acting illegally to avoid redundancy payments, that may be due to employees if their position is genuinely redundant in the scenario that a business can no longer afford to pay them.

Employees can contact the ATO on 1800 060 062 if they are concerned about termination payments and JobKeeper.

A business can apply to the Fair Work Commission to reduce the amount of redundancy pay if they are unable to afford the amount due to the employee. Use the form Application to vary a redundancy pay

Genuine Redundancy or Non-Genuine Redundancy?

A genuine redundancy is when an employee is dismissed because the job they were doing no longer exists.

Genuine redundancy payments are tax-free up to a limit based on years of service, concessionally taxed as an employment termination payment (ETP) above the tax-free limit and then taxed at marginal rates for amounts above certain caps.

The tax-free amount is not part of the ETP payment; however, amounts paid over the tax-free limit are ETP payments and reported separately in the income statement.

A non-genuine redundancy is taxed differently from a genuine redundancy. Non-genuine redundancies happen in several circumstances, including when an employer places an employee in a position with little choice but to resign. For example, they offer the current job at a lower rate of pay or a choice between a package and a role within the organisation that is different to their qualifications and experience.

Non-genuine redundancies do not qualify for the tax-free threshold; however, they are taxed at concessional rates provided certain caps are not exceeded.

Taxation of Termination Payments

Taxing termination payments can be complex. Whether you are a seasoned payroll administrator or haven't made termination payments before, always check the components of termination payments and how they should be taxed.

Remember – eligible members can contact IPA Professional Assist for technical guidance if you have complex terminations to calculate. See our March newsletter for details on accessing IPA Professional Assist.

ATO – Redundancy payments
ATO – Taxation of termination payments
ATO – Applying the ETP caps
FWO – Redundancy