Advice considerations for client's affected by redundancy | Accurium

Redundancy Advice

Unfortunately, redundancy is topical. With many businesses feeling the effects of the COVID-19 pandemic some have been forced to reduce staffing levels. The consequence of this for many Australians has been redundancy. Coming to terms with redundancy can be difficult to deal with, emotionally and financially. In such cases, getting the right financial advice is critical. Advice will not only mitigate the impact of future uncertainty, but also help clients financially transition to new employment, self-employment or transition to retirement.

Employer benefits

A client may be entitled to receive a range of payments from the employer on being made redundant. The national minimum wage and the National Employment Standards (NES) make up the minimum entitlements for employees in Australia. An award, employment contract, enterprise agreement or other registered agreement can’t provide for conditions that are less than the national minimum wage or the NES1 . If your client is covered by a registered agreement2 , they will need to check the terms of their agreement for information about how much redundancy and other entitlements they will receive. Fair Work Ombudsman also provides a Pay and Conditions Tool3 to help your clients find and calculate their minimum award pay rates and entitlements for the Fair Work System.

Common entitlements from the employer include:

  • tax-free redundancy amount – based on employee’s completed years of service;
  • Employment Termination Payment (ETP)4 – includes amount exceeding the tax-free amount; and
  • other payments like accrued long service leave and annual leave – paid as a lump sum on termination.

A redundancy amount is only concessionally taxed if it is genuine. A genuine redundancy5 occurs when all the conditions below are satisfied:

  • a payment received is in consequence of an employee termination;
  • termination involves employee being dismissed from employment;
  • dismissal is caused by the redundancy of the employee’s position; and
  • redundancy payment is made genuinely because of a redundancy.

In other words, a genuine redundancy happens when the employer decides that a specific position is no longer needed and as a result terminates the employment of an employee. A non-genuine redundancy occurs when the:

  • termination of employment is due to employee’s retirement;
  • employee is Age Pension age or older on the date the termination of employment;
  • employee leaves the employment voluntarily;
  • employee’s contract has terminated; or
  • employment has been terminated as a result of disciplinary action or inefficiency.

Tax-free amount of redundancy payments

The concessional or tax-free amount of a genuine redundancy is only available to individuals who are under Age Pension age6 at the time of dismissal. The tax-free amount is based on the number of full years of service completed by the employee. Tax-free amount = Base amount7 + (service amount7 × completed years of service). For 2019-20, the tax-free amount = $10,638 + ($5,320 × completed years of service).

Case study 1 - tax-free amount

Jessica, aged 62, worked in a company for ten years and six months. Her position was made redundant in March 2020. Therefore, she will be eligible for a tax-free redundancy amount of $63,838 ($10,638+($5,320x10)). Any lump sum amount above $63,838 will form a part of her ETP payment.

Taxation of non-tax-free amounts of redundancy payments

The part above the tax-free amount of a redundancy payment is taxed as an ETP. This amount along with other payments like unused annual leave and long service leave are included in your client’s assessable income and are generally taxable. The tax rate depends on the type of payment being received. See tables 2 and 3 below that outlines the applicable rates:

Table 1: Tax applicable on ETPs – 2019-20

   Up to the ETP cap8 of $210,000  Above the ETP cap of $210,000
Less than preservation age   30%  45%
Preservation age or over  15%  45%
Note: These rates are capped rates and excludes Medicare levy.

 

Table 2: Tax applicable on other common termination payments 

Type of leave  Period of accrual  Genuine redundancy   Termination, retirement or resignation 
Annual leave  Before 18/08/93  30%  30%
 From 18/08/93  Marginal rate
Long Service leave  Before 16/08/78  5% at client's marginal rate   5% at client'd marginal rate
 16/08/78 to 17/08/93  30%  30%
 From 18/08/93  Marginal rate

Note: These rates are capped rates and excludes Medicare levy.

As these payments are assessable, a client’s entitlement to some Government benefits, like Government co-contribution and spouse tax offsets, may reduce because the eligibility for these benefits is based on various definitions of taxable, or adjusted taxable income. Similarly, the inclusion of these termination payments in taxable income can impact their:

  • Centrelink benefits like Family Tax Benefit (FTB) A & B, Child Care Subsidy and Commonwealth Seniors Health Card);
  • Availability of super benefits like low income super tax offset;
  • Tax offsets (potential reduction to the availability of low income tax offset, low and middle income tax offset and senior Australians tax offset), and 
  • Division 293 liability, Medicare levy and Medicare surcharge liability.

Centrelink benefits

When a client is made redundant, the immediate necessity for many will be to supplement their loss of income while they seek another job or transition to retirement. Centrelink provides JobSeeker Payment (JSP) as financial support to those eligible while they look for another job. In March 2020, the Government also announced additional benefits and relief measures to Australians as a response to the COVID-19 pandemic.

What is a JobSeeker9 Payment?

JSP is available while your client is ‘unemployed’10 and looking for work or doing approved activities to find a job. It can also be available to clients who are sick and injured and are unable to perform their usual work or study for a short period of time. Lump sum payments from redundancy is not treated as income for JSP. However, if the client is yet to apply for the payment, then various waiting periods may apply.

Eligibility includes:

  • age between 22 and Age Pension age;
  • meeting the income (including the partner income test) and assets test; and
  • meeting the residency requirements11.

The means test thresholds and payment rates for the JSP are summarised in tables 4 and 5 in the Appendix. A recipient of a JSP is automatically entitled to a Health Care Card12.

Mutual obligation requirements
There are requirements for JSP applicants to ensure that they are actively seeking work and are participating into activities that will help them gain employment. The job seeker is required to have a job plan that outlines their mutual obligation requirement. Exemptions13 from mutual obligation requirement may apply for those who are temporarily sick or injured, those facing crisis like death of a family member or domestic violence or parents who are the principal carer. These requirements differ based on the age of the job seeker. For applicants under the age of 55, the requirements can include looking for and accepting suitable work, attending appointments with their employment services provider, undertaking an approved course of education or training, attending job interviews and undertaking suitable job activities. If your clients are 55 or older, they can meet these requirements by spending at least 30 hours per fortnight (p.f.) on activities that include suitable paid work, self-employment, approved voluntary work or a combination of the three. Those between age 55 and 59, who have been on the payment for less than 12 months, must do at least 15 hours p.f. as suitable paid work. In other words, they cannot undertake voluntary work for more than 15 hours p.f.

Waiting periods
There are various waiting periods being applicable for clients applying for the JSP. Some clients may be exempt from serving certain waiting periods in circumstance like financial hardship. Certain waiting periods can also be served concurrently13. For example, the income maintenance and liquid assets waiting periods are served concurrently.

Ordinary waiting period – The ordinary waiting period is one week, and all applicants are required to serve in addition the other waiting periods like liquid assets waiting period.

Liquid assets waiting period – The liquid assets waiting period can vary from one week to 13 weeks depending on the amount of liquid assets15 they own. This period is calculated as follows:

Recipient   Calculation Maximum period served if the amount of liquid assets are: 
A member of a couple with or without a dependent child or a single with a dependent child (Liquid assets – $10,000)/$1,000 $23,000 or more
Single without a dependent child  (Liquid assets – $5,000)/$500  $11,500 or more

Income maintenance period – applies if the applicant receives a redundancy/ termination payment including accrued lump sum leave payments. This period is applied based on the expectation that the client will support themselves using the money paid in the form of redundancy or termination payout. This waiting period generally applies from the date of the redundancy and is based on the amount of termination benefit received represented in the form of weeks. For example, the waiting period for a redundancy payout of $20,000 and six weeks of annual leave is calculated as follows: $20,000/$1,000 (weekly wage) = 20 weeks + six weeks of annual leave. Therefore, the total income maintenance period to be served is 26 weeks. There is no maximum period that applies to this waiting period. Other waiting periods14 like Newly arrived residents waiting period (one, two or four years), Seasonal workers preclusion period (based on period worked and income during that period), Compensation preclusion period and Unemployment non-payment period may also apply.

Additional Jobseeker measures post COVID-19

The Government has temporarily expanded certain eligibility measures and have introduced:

  • a Coronavirus supplement commencing 27 April 2020;
  • two new one-off Economic Support Payments16 to certain income support payments recipients (including JobSeeker payment) and concession card holders;
  • a more liberal qualification and means testing criteria for JSP applicants.
  • a new JobKeeper Payment17 (JKP) in the form of wage subsidy for eligible businesses and not-for-profits impacted by COVID-19; and
  • reduced deeming rates for the purposes of assessment of income test.

JobSeeker and Coronavirus supplement measures 

Coronavirus supplement: A new, time-limited Coronavirus supplement will be paid at a rate of $550 p.f. to eligible recipients for a period of six months18. This will be paid to both existing and new recipients of JSP, Youth Allowance (YA), Austudy, ABSTUDY, Parenting Payment (PP), Farm Household Allowance and Special Benefit. Tables 6 and 7 in the Appendix outlines the total JSP rate after taking the Coronavirus supplement into account.

Expanded access: JSP (including YA for job seekers) eligibility will provide payment access for permanent employees who are stood down, lost their employment and sole-traders, self-employed, casual and contract workers who meets the income test as a result of COVID-19 impact. The payment can also be accessed by carers who provides care for people affected by COVID-19. Reduced means testing: Asset testing for JSP, YA and PP will be waived for the period of the Coronavirus supplement. Additionally, the partner’s upper income test threshold beyond which the JSP along with the Coronavirus supplement is stopped, has also been increased from $1,858 p.f. ($48,308 annually) to $3,068.80 p.f. ($79,788.80 annually). Table 8 in the Appendix compares the income test thresholds for partners before and after the reduced means testing came into effect.

Waiting periods waived: The ordinary waiting period of one week, the Liquid Asset test Waiting Period and the Seasonal Work Preclusion Period will be waived until the period for which the Coronavirus supplement is paid. The Newly Arrived Residents Waiting Period will be temporarily waived for recipients of Coronavirus supplement (until 24 September 202018). When the supplement ceases, those people that were serving a Newly Arrived Residents Waiting Period will continue to serve the remainder of their waiting period. Income Maintenance, Compensation Preclusion Periods and Unemployment Non-payment Period will still apply. Although the commonly applicable waiting periods like ordinary waiting period and liquid assets waiting period has made it easier in terms of eligibility, the income maintenance period (based on the redundancy/leave payments) still applies and that might delay the commencement of JSP.

Relaxed mutual obligation requirements: There will be a temporary exemption to the mutual obligation requirements until 1 June 2020 (unless extended). During the exemption, the clients won’t be required to attend appointments, look for work or do any of the activities in the Job Plan.

Relaxed definition of unemployment: Under the new measures the Secretary may consider an individual as unemployed if due to the adverse effect of COVID-19:

  • a person became unemployed;
  • a sole-trader or self-employed person’s business was suspended, or suffered a reduction in turnover;
  • the person’s working hours were reduced;
  • the person is in quarantine or self-isolation or is caring for a person who is in selfisolation due the requirement made by, the Commonwealth, a State or a Territory or a health professional; or
  • a person is on a leave without pay or reduced pay.

Advice consideration for the immediate future

If your clients or their employer may be impacted by Coronavirus, they may have an opportunity to continue working if they are eligible for JKP. Continuing their work while receiving JKP may mean they can still receive their associated entitlements like SG payments and accured leave entitlements depending on their work arrangements. However, if JKP is not an option and they have been made redundant, then eligibility for JSP can be considered. With the relaxed eligibility (e.g. waived-off ordinary and liquid assets waiting period) in the current situation, advisers can also consider JSP for clients who they may have not considered before. Supplementary benefits with JSP can include Coronavirus supplement, Economic Stimulus Payment, Rent Assistance (if clients are paying rent) and Health Care Card access. Once the current relaxed eligibility measures cease, there are planning opportunities to help meet eligibility for those clients who may have an impact on their JSP due to assets test assessment being commenced back again. For clients who are eligible to start a transition to retirement (TTR) income stream, there can be opportunities to implement a TTR strategy. Implementing a TTR strategy can help clients make personal deductible contributions to minimise tax on redundancy, while receiving income payments to maintain the cashflow simultaneously. However, before implementing the TTR strategy, the impact of starting an income stream on the JSP should be considered. This is because an income stream is assessed as an asset (consideration for post 24 September 2020) and is subject to deeming19 for the purposes of JSP.

Retirement

Redundancy can sometimes be a trigger for retirement. In such cases, it would be helpful to focus more on various phases of retirement planning strategies for the client. For example, strategies for clients approaching Age Pension age and strategies for clients Age Pension age or above. Strategies before turning Age Pension age can include maximising contribution caps, meeting a condition of release20 and starting an income stream, purchasing annuities for a guaranteed regular lifetime income and a recontribution strategy. However, if the client is of Age Pension age, strategies like steps to maximise Age Pension or working towards client’s eligibility for various Concession cards could give a significant boost to client’s retirement outcomes. We will elaborate on some of these strategies in our future articles.

Appendix 

Table 3: Age Pension age

Date of birth Pension age
Before 1 July 1952 65
1 July 1952 to 31 December 1953 65 years and six months
1 January 1954 to 30 June 1955 66 years
1 July 1955 to 31 December 1956 66 years and six months
On or after 1 January 1957
67 years

Unemployment
Unemployment for the purposes of JSP includes a person:

  • who doesn’t have paid work but has the intention and the capacity to be a part of the labour market; and
  • who may be employed in the general sense, but the Secretary can exercise a discretion to treat the person as unemployed and satisfies mutual obligation requirement under section 595.

An example could be a person who participates in drug and alcohol treatment as an activity in their job plan is treated as unemployed while they satisfy their participation in the treatment.

 

Table 4: Income and assets test threshold for JSP as at 20 March 2020

Assets test threshold family situation

Homeowners Non-homeowners
Single  $263,250
$473,750
Couple combined $394,500 $605,000
Income test threshold – Single and not a principal carer
$104 to $254 p.f. 50 cents reduction  
Above $254 p.f. 60 cents reduction  
No entitlement at $1,086.50 p.f.
   
Income test threshold – Partnered – personal income test
$104 to $254 p.f.
50 cents reduction   
Above $254 p.f
60 cents reduction  
 No entitlement at $993.50 p.f    
Income test threshold – Partner’s income until 26 April 2020
Partner’s income $993.50 No impact  
For each $ > $993.50 p.f. 60 cents reduction  
No entitlement at $1,858 p.f.    
Income test threshold – Partner receiving pension
Half combined income Amount payment reduces by  
$104 to $254 p.f. 50 cents reduction  
Above $254 p.f 60 cents reduction  
No entitlement at $1,987 p.f. combined income

 

Table 5: Payment rates for JSP as at 20 March 2020

  Fortnightly payment Energy supplement p.f. Total p.f. 
Single $565.70 $8.80 $574.50
Single with at least one dependent child
$612.00 $9.50 $621.50
Single, 60+ and > 9 months on JSP $612.00 $9.50 $621.50
Single with special exemption $790.10 $12.00 $802.10
Partnered (each) $510.80  $7.90 $518.70

 

Table 6: JSP rates with Coronavirus supplement

Situation Fortnightly payment Energy supplement p.f. Coronavirus supplement p.f.
Total p.f.21
Single $565.70 $8.80 $550 $1,124.50
Single, 60+, > 9 months
$612.00 $9.50
$550 $1,171.50
Partnered (each)
$510.80  $7.90 $550 $1,068.70

 

Table 7: Comparison of JobSeeker rates between the old and the new measures

Deemed asset level JSP without COVID-19 measures JSP with COVID-19 measures
$100,000 $574.50 $1,124.50
$200,000 $562.38 $1,112.38
$300,000 - $994.11
$400,000 - $950.84
$800,000 - $777.76
$1,000,000 - $691.22
$1,300,000 - $561.41
$1,400,000 - -
Assumptions: These figures are based on single homeowner rates and are calculated based on the assumption that the client has no other income and assets.

 

Table 8: Partner’s income test threshold under COVID-19 measures

Income test threshold: Partner’s income until 26 April 2020 – Under COVID-19 measures  From 27 April 2020 
Partner’s income $993.50                  No impact No impact
For each $ > $993.50 p.f.                   60 cents reduction 25 cents reduction
No entitlement at $1,858 p.f. $3,068.80 p.f.
 
Footnotes
1 Fair Work Ombudsman website outlines more about who is covered by NES and the range of entitlements available to employees.
2 Information about specific redundancy entitlements in your client’s award and registered agreements can also be found on the Fair Work Ombudsman website
3 https://calculate.fairwork.gov.au
4 Can include a gratuity or golden handshake, severance pay, non-genuine redundancy payments, payments in lieu of notice of termination, unused sick leave or rostered days off, compensation for the loss of job or future super payments, compensation for wrongful dismissal paid within 12 months of termination and lump sum payments paid on employee’s death. Final pay as salary/wages, unused annual leave and long service leave on termination does not form a part of ETP.
5 TR 2009/2.
6 See Table 3 in the Appendix to know your client’s Age Pension age based on their date of birth. For employees who received an ETP before 1 July 2019, the applicable age is 65 (instead of Age Pension age).
7 Indexed annually.
8 If it is non-genuine redundancy, the part of your ETP that is concessionally taxed will usually be limited by the ‘whole-of-income cap’ instead of the ETP cap. See the ATO webpage for more information on the types of cap applicable.
9 From 20 March 2020, JSP replaces few payments that includes Newstart Allowance, Sickness Allowance, Bereavement Allowance, Wife Pension, Widow B Pension, Widow allowance and Partner allowance.
10 See Appendix for the definition.
11 Broadly needs to reside in Australia and either be an Australian citizen or is a permanent visa holder or SCV holder who is a protected SCV holder. For more information refer to the residency rules explained in 3.2.1.05 and 3.1.1.10 of the guide to social security law.
12 See 3.9.1.65 to refer to the benefits provided by the Health Care Card.
13 For full list of exemptions, refer to section 3.11.5 of the guide to social security law.
14 Section 3.2.1.30 of the guide to social security law explains various applicable waiting periods and the ones can be served concurrently.
15 Examples of liquid assets are outlined in section 1.1.L.50 in the guide to social security law.
16 Two new one-off Economic Support Payments of $750 were introduced for eligible recipients. If eligible, clients can receive both the payments. However, those who received the Coronavirus supplement will not be eligible for the second payment.
17 Refer to our article COVID-19 Stimulus for more information on JKP and other Government stimulus measures.
18 Could be extended by the Government at a later stage.
19 The income test assessment is different for certain income streams started before 1 January 2015.
20 Clients who has an intention to retire and not work again in future, may not be eligible for JSP as the eligibility for JSP includes clients to be looking for work.
21 May be higher if a person is a non-homeowner and is also eligible for Rent Assistance.

Disclaimer

This information is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be financial product advice, legal advice or tax advice, and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances. The information is provided in good faith and derived from sources believed to be accurate and current at the date of publication. While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. We recommend that you seek appropriate professional advice before making any financial decisions.