The bottom line on redundancy
The payout is not a windfall, the experts warn, and the rules are changing on how it will be taxed.
The payout is not a windfall, the experts warn, and the rules are changing on how it will be taxed. Anyone likely to receive a redundancy payment in the next few weeks has some planning to do around a significant June 30 timing issue. The tax treatment of one part of redundancy payouts will change from July 1 and people may find that they have missed out on significant tax concessions created by contributing to superannuation.A rule that allows people to put their payout into super, as a concessionally taxed contribution, ends on June 30.The government flagged further changes to the tax treatment of payouts in the budget.An employment termination payment (ETP) is made up of money owed for unused rostered days off, money paid in lieu of notice and any gratuity or golden handshake (for example, so many weeks' pay for each year of service).For most people aged under 55, ETP payments of up to $165,000 will be taxed at a maximum rate of 31.5 per cent (for payments received in the year ending June 30). ETPs of more than $165,000 are taxed at a maximum rate of 46.5 per cent. For people aged 55 and over, the first $165,000 is taxed at 16.5 per cent and the remainder at 46.5 per cent. That threshold amount is indexed and will go up to $175,000 in the 2012-13 financial year.THE CHANGESUnder rules put in place in 2006, ETPs can be directly contributed to a super fund if they meet certain conditions. They must be classified as transitional ETPs, which means that the person receiving the money has been working under the same employment contract or workplace agreement since May 2006.Gemma Dale, the head of technical services at MLC, says anyone covered by this transitional rule and who is likely to receive a redundancy payment should make sure the payment is made before June 30."Getting the money into super is a big win," Dale says."It is the difference between paying 46.5 per cent tax and 15 per cent tax on the money."If you are over 55 and retired, you can take it back out of the super fund any time you want. If you are over 60 you can take it out tax-free."Dale says employers can tell their staff how they stand in relation to these transitional rules.The transitional rule ends on June 30, and from July 1, ETP money can no longer go directly into super.Dale says that if your employment contract has changed since May 2006, you are not covered by the transitional rule and you cannot contribute any ETP directly into super.People in that situation should look at delaying their redundancy until after July 1, when the low-tax threshold will be higher and the flood levy will have ended. In this month's budget, the government announced that it will add "certain types" of employment termination payments to assessable income and apply the highest marginal tax rate of 46.5 per cent to those payments if they take income above $180,000 for the year. This new rule is scheduled to start on July 1.Dale says it is not clear from the government's announcement exactly what parts of an ETP it intends to capture. However, it is another incentive for people looking at a redundancy to have it done before June 30.BEST USE OF PAYOUTPaul Bilson, a certified financial planner with Woodward Nhill Financial Planning, says redundancies are unfamiliar territory for most people and the risk they run in handling them is that they tend to see the payout as a windfall rather than a funding base for the maintenance of their lifestyle."People's first impulse is to do something dramatic, like pay off debt or put a large amount into their superannuation," Bilson says."Both are good strategies but before people do that, they have to think about how long it will take them to find a new job or qualify for Centrelink benefits."Their biggest problem comes if they have put the money somewhere where they no longer have access to it and then don't have any income."Because many people want to put at least part of their redundancy payout into their super fund, the super contribution rules have a big effect on achieving a tax-effective outcome.Bilson says people should talk to their employer and a planner to make sure they understand how tax and contributions rules apply to their payout. He says that when he sits down with a client to work out what to do with a payout, he encourages people to pay off debt but to do it in a way that allows them to take some of the money back if they need it.In the case of a home loan, the account should have offset and redraw facilities. If there is money left after dealing with debt, the next step depends to some extent on the person's age.People over 55 can put money into super and use the transition-to-retirement arrangements to draw income from the fund.Bilson says one of the big traps is that people assume they can apply to Centrelink for a Newstart allowance and start receiving benefits almost immediately. It doesn't work that way.Centrelink applies a couple of tests and, depending on the outcome, recipients might have to wait more than three months before benefits start to flow.Control your spending as it may take longer to find another jobAndrew Hedge had worked at a media services company for six years, the last three of them as an account manager, when in November last year the company announced a restructure and made some positions redundant. One of those positions was Hedge's.Rather than apply for another job in the company, the 30-year-old from Kyneton, in Victoria, took a redundancy package and set about looking for a new career.Hedge was looking for something different and he found it, working in sales for two small environmental services companies. But it took longer than expected."It took me 3? months to find a new job," he says. "It was difficult. I did not expect it to be as challenging as it was."Hedge is married with two children. When he received his payout he paid off his credit card debt and put the rest into his mortgage account.His wife took on some extra part-time work, while he stayed at home to look after the kids. As the months went by, bits of the redundancy payment were allocated to a couple of household jobs, Christmas spending and a family holiday."The holiday was not in the plans initially but when we found out my wife was pregnant, we thought we should have a break before the new baby arrived," he says.Hedge visited his financial planner when he lost his job. "The things he stressed were to make sure my life insurance policies were paid up, use the money to pay off some debt and have a plan for how the rest of the money would be used."When we first got the money, it was such a large amount sitting in our account. We tended to spend a bit more than we planned just because there was so much there."It started to run down a bit faster than we wanted and when my job search went on for longer than I expected, we had to ... tighten up the budget. You would always like to have more of the money left."Hedge says he has about half his payout left. It is sitting in his mortgage account."I consider myself to be a risk-averse person and my natural inclination would have been to try and stay at my old company," he says. "It was quite a risk for me to move on and start a new career. But ... it was a good change."The thing we learnt ... is how quickly you can spend it and how much control you need to exercise over your spending."