ASPECTS OF FINANCIAL PLANNING. Dealing with Redundancy July 2012

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1 ASPECTS OF FINANCIAL PLANNING Dealing with Redundancy This Aspect provides an overview of the rules that apply to payments made by employers to employees in the event of genuine, bona fide, redundancy.

2 Background The thought of leaving employment unexpectedly due to redundancy is often a daunting one for individuals and their families. Questions such as: How much will I receive? How is the payment taxed? What will I do with the money? Can the money be put into superannuation? Will I be able to find new employment? Are usually top of mind. The issues surrounding the taxation of your redundancy payout and the interaction of this payment with superannuation can be quite complex. However dealing with these issues is an area where your financial adviser is able to provide significant assistance. Being made redundant may cause some emotional turmoil and this is where your adviser plays a critical role. Their advice helps ensure the financial aspects of redundancy are in hand allowing you to focus on the other issues you are facing. What is a genuine redundancy payment? A genuine redundancy payment (GRP) is an amount of money received by an employee who is dismissed from their employment because their position is genuinely no longer required. Not every redundancy payout is a GRP. As there are tax concessions associated with these payments, there are a number of requirements that need to be met in order for your payment to be considered a GRP. These basic conditions are: The payment is made in consequence of termination of employment: a sum of money is paid as an effect or result of the termination. The employee must be dismissed from employment: there must be no other suitable position for the employee with a particular employer meaning they then must be dismissed. The dismissal is caused by the redundancy of the employee s position and not for other reasons, for example poor performance, or inappropriate behaviour. The payment must be made genuinely because of redundancy: contrived arrangements between employers and employees in an attempt to qualify as genuine redundancies do not meet the conditions. In addition to these requirements in order to qualify as a GRP, the following other conditions must be met: The employee must be less than 65 years old Generally, the payment cannot be one which is made at the end of a fixed term period of employment If the payment is being received from a related or associated employer, the actual payment should not exceed what could reasonably be expected if the parties had been dealing at arm s length There must be no arrangement in place to re-employ the person being terminated; and The payment must not be in lieu of superannuation benefits. This means that the amount received cannot be paid to replace superannuation benefits that would be payable at the time of termination or sometime in the future. What are the tax consequences of a GRP? Where your payment qualifies as a GRP it will receive certain taxation concessions. Depending on the size of your payment and how long you have been employed with your employer, some or all of your payment may be received tax free. In the 2012/13 financial year, you are able to receive the following amount tax free: $8,806; plus $4,404 for every full year of service. For example, if you worked for 10 full years with your employer, $52,846 of your redundancy payment would be received tax free. This portion of your GRP must be taken as cash.

3 The Remainder of your GRP is treated as an employment terminiation payment (ETP) and will be subject to ETP tax. A special case. In some cases employee contracts provide an entitlement to an amount of money to be paid when you leave your employer voluntarily. This amount is not added to your GRP when calculating the tax free portion however it is treated as an ETP and taxed accordingly. How is the ETP portion of my payment taxed? The manner in which an ETP is taxed may be quite complex and is subject to differing sets of arrangements, depending on the following factors: Your age Length of employment with your employer as an additional part of your ETP may be tax free where you commenced employment prior to 1 July 1983 Eligibility to roll-over the payment to your superannuation fund; and The specifics of your employment agreement. An ETP may be made up of a tax free and taxable component. The tax free component of an ETP, naturally, will be received tax free. The tax you pay on the taxable component will depend on your age and the amount you receive as shown in the following table: Your age^ Under preservation age* Preservation age or over Tax on taxable component Up to $175,000 30% plus Over $175,000 top marginal tax rate plus Up to $175,000 15% plus Over $175,000 top marginal tax rate plus ^ At the end of the financial year in which the ETP is paid * Preservation age: For those born prior to 1 July 1960 your preservation age is 55. Those born after 1 July 1960 will have a higher preservation age according to your date of birth. Those born after 1 July 1964 will have a preservation age of 60. Long service leave and annual leave received on termination Depending on your circumstances and the amount of your final employment payout, only part of the payment may be classified as a GRP. Upon termination, it is common for employees to receive payouts in respect of accumulated but unused long service leave (LSL) and annual leave (AL). These amounts are subject to their own specific taxation regime and do not form part of your GRP and are not treated as ETPs. An amount received on termination because of genuine redundancy in respect of AL is taxed at a maximum rate of 30% plus. Unused LSL may be subject to taxation at differing rates, depending upon when the accrual period in respect of the LSL commenced. For LSL accrued in the period up to 16 August 1978, 5% of the amount is included in the assessable income of the taxpayer and taxed at their marginal tax rate. All other LSL paid out is taxed at a maximum rate of 30% plus Medicare levy. Example 1 Bill Smith, aged 58 years has been an employee of ABC Limited for 21 years. Due to the prevailing economic environment, ABC Limited is forced to lay off 20% of its workforce. Bill is subsequently dismissed from his employment and is entitled to a lump sum payment of $200,000. Of this amount, $50,000 is in respect of unused LSL and $20,000 is in respect of unused AL. In addition, Bill s employment contract stated that he would receive $30,000 in the event he voluntarily resigned or retired. LSL and AL are treated separately for taxation purposes so they do not form part of either a tax free GRP or an ETP. As these amounts accrued after 15 August 1978 they are subject to 30% tax plus. As Bill s employment contract stipulated that he would receive $30,000 had he voluntarily resigned or retired, this voluntary termination amount is excluded from forming part of his GRP and is instead taxed as an ETP. The remaining $100,000 is a GRP. Of this amount Bill is able to receive the first $8,806 as well as $4,404 for each completed year of service, tax free. Therefore the tax free amount of the GRP is $101,290 ($8,806 + (21x $4,404)). As the calculated tax free amount of the GRP is greater than the $100,000, Bill will receive the total remaining $100,000 tax free. Furthermore, as Bill is over age 55, the total ETP of$30,000 is taxed at 15% plus.

4 What other considerations are there? Whilst most people are primarily concerned with the taxation aspects of receiving their termination payment, you also need to be cognisant of the following matters that may be relevant when your circumstances change due to being made redundant. Determining what to do with the proceeds of your redundancy payment is likely to necessitate a process of taking stock of your entire financial situation. This will involve re-evaluating your goals and determining how your redundancy has impacted your overall financial plan. You may be required to re-calculate and examine: What are your assets? What are your liabilities? How much does it cost you and your family to live each week? Is this cost of living able to be reduced by removing luxury items from your budget? Personal goals Situations involving a significant change in direction often bring people to sit down and re-evaluate their personal goals, needs and desires. The following questions should be considered: Do I want to continue to work? Will I be able to find work? Was I happy with the work I was doing? Should I consider starting my own business? Should I undertake some educational training programs in a new field and expand my horizons? Maybe I could work part-time from now on? Would I be happy to retire now? Quite often, it is your financial situation which will assist with making these decisions for you. Can you afford to retire? Can you afford to take time off without pay to undergo training? Do you have enough funds to start your own business? Are you prepared to risk them in a business venture? What are your future employment prospects? In any case, it is essential to thoroughly evaluate your financial position in order for you to be able to assess the direction you will take with regard to future employment. Superannuation Depending on your circumstances, you may be required to roll over your superannuation entitlement from the fund to which your employer has been contributing. This process will involve evaluating and choosing another appropriate product in which to house your superannuation savings. You may wish to explore the option of accessing some or all of your superannuation benefit when you are made redundant. The rules that dictate whether you can do so are complex and depend on your age, and potentially, your future intentions regarding finding employment. Where you are under age 55 you generally cannot access your superannuation benefits except in limited circumstances. Where you are over 55 and do not intend to find future employment you will most likely be able to access your superannuation as a lump sum, a pension or a combination of both. Where you are over 55 but intend to find future employment you will still be able to access your superannuation benefit but generally only in the form of a pension. The restrictions on withdrawing your superannuation benefits become less stringent once you reach age 60 and you should consult your adviser for further details. Continuation of insurance Continuation of your personal insurances is also a key consideration when one is made redundant. Whilst you were employed, you may have had life, disability and/or salary continuance insurance through your employer s superannuation fund. When you cease employment, or shortly after, in many cases this insurance will also cease. If your superannuation benefit is able to be retained in your employer fund, the fund may offer ongoing insurance cover so long as you reinsure within a certain period. Generally this insurance does not require completion of further forms or undertaking medical tests. Where such a continuation option is not available, it is essential that you reinsure yourself prior to your existing cover expiring. Government assistance Social security rules are quite complex. It may be that you are entitled to some level of support from the Government. This will depend on a number of factors, such as your age, marital status, recent employment history, the level of income you and/or your spouse earn, and the level of assets you both hold. Generally, the benefits which may be available to you are Newstart Allowance, if you are actively seeking work, or the Age Pension if you are age pension age and retired. Conclusion Being made redundant and the receipt of a resulting termination payment can give rise to a number of taxation, financial and lifestyle issues. Prior to determining a course of action with regard to any of these aspects, one is well served by discussing the issues with their adviser in order to navigate the way forward.

5 How to Contact Centric Wealth Advisers Ltd Sydney Melbourne Brisbane Canberra Level 9 60 Castlereagh Street Sydney NSW 2000 Level 14P 530 Collins Street Melbourne VIC 3000 Level Edward Street Brisbane QLD 4000 Mezzanine Level 55 Wentworth Avenue Kingston ACT 2604 Tel Fax Tel Fax Tel Fax Tel Fax info@centricwealth.com.au This article has been prepared for clients of Centric Wealth Advisers Limited ABN AFSL (Centric Wealth) and others on request. The article is based upon generally available information and is not intended to be, or to replace specialist advice in the areas covered but rather, the article is intended to be informative and educational only. Centric Wealth, its associates, representatives and authorised representatives shall to the maximum extent permitted by law disclaim liability, directly or indirectly, for any loss or damage caused to you in respect of the information provided in this article. This article may contain general advice which is defined in the Corporations Act to mean that we have not taken into account any of your personal circumstances, needs or objectives. It is therefore imperative that you determine, before you proceed with any investment or enter into any transactions, whether the investment or transaction is suitable for you in consideration of your objectives, financial situation or needs and you must therefore, before acting on any information included in this article, consider the appropriateness of the information having regard to your personal situation. Centric Wealth recommends that you obtain financial and tax or accounting advice based on your personal situation before making an investment decision.