Where the termination of employment is deemed a “Genuine Redundancy” under the tax rules, payments that the employee receives for the termination that exceed the amount that would be received after a voluntary resignation get special, reduced tax treatment.

A Base Amount and a further Service Amount for each Year Of Service may be entirely tax-free!  For the 2013 income year, the base amount is $8,806 and the service amount for each year of service is $4,404.  Accordingly, and as an example, the tax-free limit for a Genuine Redundancy payment where there is ten years of service would be:

$8,806 + ($4,404 x 10) = $52,846

Amounts for long service leave and annual leave are taxed at the usual marginal tax rate except where there were accrued prior to August 1993.  Those earlier accruals attract some further tax concessions.

Any further amounts paid, above the tax-free limit, might be taxed at a concessional rate provided the total amount is under a specified monetary cap.

For example, someone aged 40 that was genuinely redundant in the 2013 income year would be taxed at 31.5% on any amount above the tax-free limit up to the current cap which is $175,000.

For the redundancy to be considered “genuine” under the Tax Act, there are some important factors including:

• The position must cease to exist;
• The termination must be involuntary;
• The employee must be under 65 years of age, or an earlier required retirement date in certain circumstances;
• The payment must be at arm’s length;
• There must be no arrangement between the employee, employer or another business to employee the terminated employee after the dismissal; and
• There are other technical exclusions.

Where someone has a “dual capacity” as a director and common law employee, careful consideration is required to determine whether the dismissal was involuntary.

The Tax Office recognises that the employee did not consent where:

• She did not ultimately agree and was not actively involved in the decision; and
• There was no real or practical choice due to external circumstances.

The Tribunal in a case called Long decided there was a Genuine Redundancy where the company’s business was closed down after the loss of a major customer and the active director who was involved in day-to-day management.  The Board unanimously decided to windup the business and retrench all employees including that particular director.

Where a director’s redundancy is being considered, careful records of decision making and the reasons for those decisions should be kept.

WTB 2013/162, s 93-175, s 83-170, s 82-135, TR2009/2, 97 Tax Act Commentary 83.1500, Re Long v FCT (2007) 66 ATR 806

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