Ask an expert - taxation treatment of redundancy payments
[ 28-Mar-2010 ]Q:
I have a query on the taxation treatment of a Redundancy Payment / Golden Handshake to be made to an employee aged 66. As he is 65 and over, is it still treated as an ETP? Or is it just treated as ordinary earnings and taxed at his marginal rate?
A:
The first issue to cover off is, are we talking about a Redundancy Payment or a Golden Handshake?
As a general rule a golden handshake is an ex-gratia payment and as such will always be treated as an ETP irrespective of the reason for the termination or the age of the recipient. If the payment is being made only because of redundancy we need to consider the ATO’s use of the word “genuine”.
GENUINE REDUNDANCY PAYMENTS
A redundancy is genuine (‘bona fide’) when you dismiss an employee because the job they were doing has been abolished.
Situations that are not genuine redundancies include:
- dismissal of an employee who has reached normal retirement age
- termination of an employee who leaves voluntarily
- replacement of an employee by another employee to carry out the same duties soon after they have left
- dismissal of an employee for disciplinary reasons, or
- dismissal of an employee due to inefficiency.
If any of the above criteria are met (in this instance reaching 65 years of age) the termination is not considered a “genuine” redundancy for tax purposes. This does not impact on what gross payments may be required by legislation, agreements or company policy.
Consequently, no amounts can be allocated to Lump Sum D, any amounts that would have otherwise been ‘D’ become ETP values; but wait there’s more…
It also means that payments for unused leave (AL, LL & LSL) need to be split and taxed as if it was a normal termination, ie AL & LL post ’93 – Salary & Wages, pre ’93 – Lump Sum A, & LSL post ’93 – Salary & Wages, pre ’93/post ‘78– Lump Sum A & pre ’78 Lump Sum B.
The links below should provide some additional guidance.
http://www.ato.gov.au/businesses/content.asp?doc=/content/78980.htm
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