January 16, 2020   |   Tips

What are the changes to the genuine redundancy rules in relation to pension age?

The Australian Government announced with the 2018-2019 Budget changes that it was extending the concessional tax treatment of genuine redundancy early retirement scheme payments to align with the current age pension qualifying age.

These changes apply to payments received by employees who were dismissed or retired on or after 1 July 2019.

The Treasury Laws Amendment received Royal assent on 28 October 2019.

What are genuine redundancy early retirement scheme payments?

Genuine redundancy and early retirement scheme payments are tax-free up to a limit based on an employee’s years of service.

Payments made to an employee under the redundancy and early retirement scheme are considered tax fee up to a set limit, based on the number of years of service by the employee.

This tax-free amount does not form part of the employee’s employment termination payment (ETP).

Any remaining payments made to an employee above this tax-free limit is taxable and part of the employee’s ETP.

What was the previous rule?

Prior to the Treasury Laws Amendment, genuine redundancy early retirement scheme payments were only eligible for employees under the age of 65 years of age. If over 65 years, the employee was not entitled to any tax-free payments.

What is the age pension qualifying age?

Instead of having just one fixed age, the age limit is now in-line with the current age pension qualifying age and is dependent on when the employee was born.

See below for the age pension qualifying ages;

Genuine redundancy

What does this mean for employers?

Some employees who were paid a redundancy after 1 July 2019, before the changes became law may have had more tax withheld than would be required under the new law.

In these circumstances, the employee can ask the employer to refund the excess tax withheld for any payment that qualifies as a genuine redundancy payment. As an employer, you can revise the payment and refund the employee, however, you are not obliged to do this, as at the time the payment was made, the amounts were not withheld in error.

What happens if you don’t refund the excess tax withheld?

As the employer, if you do not recalculate and refund the excess withholding, the employee will receive a credit for the tax withheld when they lodge their income tax return.

What do you need to consider when calculating genuine redundancy early retirement scheme payments going forward?

Before calculating a genuine redundancy early retirement scheme payment, make sure you consider the following;

  • If an employee’s job is being made redundant, you need to first determine the age of the individual at the time of the redundancy; and
  • Once the employee’s age is confirmed, refer to the age pension qualifying age chart (as shown above) to see if they have reached the pension age or not.

If the employee is less than the pension age, then they are eligible for the concessions of a genuine redundancy.

If the employee has reached the pension age, then they are not eligible for the concessions of a genuine redundancy.

For more information, visit the ATO website.