BDO Consultant Malcolm Fielden discusses some positive superannuation-related tax news on genuine redundancy and early retirement scheme payments, following the Government’s announcement of what might prove to be a major planning opportunity for taxpayers approaching 65 years of age and, businesses in general.
A process currently limited by age requirements
Under the current rules, significant tax concessions, including tax-free status, are afforded to genuine redundancy and early retirement scheme payments, but only if the recipient ceases their employment before they reach the age of 65.
Australians are increasingly remaining in the workforce over the age of 65. In January 2018, Australians aged 65 and over had a workforce participation rate of 13% (17% for men and 10% for women), compared with 8% in 2006 (12% for men and 4% for women)1.
In our capacity as advisers, we meet with many individuals and businesses going through a genuine redundancy or early retirement scheme process. For a number of good reasons, a business may wish to structure its redundancy process as voluntary, particularly where they wish to minimise the risk of unfair dismissal claims, negative impacts to staff morale and client relationships. The catalyst for employees accepting a voluntary redundancy is often the lure of tax-free money, particularly if they are nearing retirement age.
In line with current trends we are increasingly seeing the redundancy process frustrated as more employees are denied the concessions on the basis the age 65 requirement has not been met.
Alignment with the Age Pension
The Government announcement is aimed at amending law so the tax concessions afforded to genuine redundancy and early retirement scheme payments will be aligned with the Age Pension qualifying age from 1 July 2019. The minimum Age Pension qualifying age will be 66 on 1 July 2019, progressively rising to 67 by 1 July 2023.
This change means that all individuals aged below the Age Pension qualifying age will be able to receive a significant tax saving, including a tax-free component on a genuine redundancy or early retirement scheme payment they receive from their employer.
Benefits for business and employees
The change will most likely be welcomed by businesses, as it may remove some of the frustrations experienced by employees nearing or over the age of 65, who are contemplating voluntary redundancy. Businesses can particularly benefit by retaining good employees in their business for longer, rather than having them depart close to age 65 due to the lure of tax-free payments.
This may also benefit individuals because it can allow them to stay in their job slightly longer and continue to add to their superannuation, rather than leaving a job they enjoy because they are approaching age 65.
The change will also have a significant flow on benefit as a result of the exemption from the “whole of income” cap for a genuine redundancy or early retirement scheme payment, which is currently not afforded to those individuals over the age of 65.
Case study example
Assume a 65-year-old with 10 years of service exits their work under a genuine redundancy program. They are offered a $100,000 separation payment, in addition to their annual and long service leave. Currently, as they are aged over 65 years, the separation payment is treated as an Employment Termination Payment (ETP) and not a genuine redundancy payment. They do not receive a tax-free component and could pay tax on the separation payment of between $17,000 (best case) and $47,000 (if the “whole of income” cap applies). Their leave will be taxed at marginal tax rates.
Under the proposed reform, the individual would qualify for a tax-free component of $62,399 (based on 2019 thresholds) and pay just $6,392 in tax (ETP of $37,601 x 17%). The “whole of income” cap would not apply to the residual ETP as it is now classified as an “excluded payment”. This is a tax saving of between $10,608 and $40,608. Furthermore, tax on their leave will be capped at 32%.
The exclusion of the tax-free amount from taxable income may also keep the taxpayer below the Division 293 threshold of $250,000, hence leading to a further potential tax saving on their superannuation contributions in the year of cessation.
Potential for missed opportunities
Although the change is welcomed there may be a missed opportunity with regards to other provisions that limit concessions to those aged 65. One such opportunity would be to align the Age Pension qualifying age to the rules surrounding acceptance of superannuation contributions and the bring forward rule for non-concessional contributions.
If there is a possibility that you may be offered a genuine redundancy or early retirement scheme payment and would like to discuss the tax consequences, seek professional advice. Or, if you are in a business that may be offering a genuine redundancy or early retirement scheme and would like to find out more about the tax consequences, please contact a professional advisor.
Malcolm Fielden is a Consultant at BDO in Melbourne. Connect with Malcolm via LinkedIn. He was previously a Partner at Chartered Accounting firm Whelan + Cook Advisors for more than three decades. You can also connect with BDO via LinkedIn, Twitter or Facebook.
Disclaimer: Before making any investment or financial decisions you should consider, with or without the assistance of a professional adviser, your particular objectives, and financial circumstance or needs. The information contained in this article is purely factual in nature and does not take into account your personal objectives, financial situation or needs. The information is objectively ascertainable and, therefore, does not constitute financial product advice. Further, the above information is provided as an information service only and, therefore, does not constitute financial product advice and should not be relied upon as financial product advice. If you require personal advice that takes into account of your particular objective, financial situation or needs, you should consult a professional advisor.