Starting from 1 July 2019, all individuals younger than 66 will be able to receive the tax-free component for redundancy and early retirement scheme payments.
Previously, the tax-free component was only available to individuals aged below 65.
The increase of age was made to coincide with the Age Pension qualifying age.
It is believed that the new rule might encourage workers to remain in the work force longer, which will allow them more time to prepare for a financially secure retirement.
What is the tax-free component for redundancy and early retirement?
Redundancy and early retirement scheme payments are only tax-free to a certain amount which is based on the employee’s years of service.
The tax-free amount is not part of the employee’s ETP. It’s reported as a lump sum in the employee’s PAYG payment summary – individual non-business.
It’s important to note that this is only available for:
- Genuine redundancies, meaning the employee’s position was no longer necessary. This does not include those who leave voluntarily, have their contract terminated or are dismissed for disciplinary or inefficiency reasons.
- Those on an early retirement scheme, which will need a class ruling by the ATO. This is a plan that offers employees incentives to retire early or resign when the employer is reorganising and re-evaluating their business.
How is the tax-free amount calculated?
The tax-free limit is: Base amount + (service amount × years of service)
For example, for the 2018–19 financial year, the tax-free limit is:
$10,399 (base amount), plus $5,200 (service amount) multiplied by the years of service.
Hence, if the employee has completed 5 years of service, the tax-free limit for the year ending 30 June 2019 is:
$10,399 + ($5,200 × 5) = $10,399 + $26,000 = $36,399
For more information, you can contact a tax champion on (03) 8393 1000 or read more from the ATO.