Nasty redundancy surprise for the over-65s

There is a nasty little surprise waiting for those facing redundancy over the age of 65 - and it is all to do with the tax laws.

Redundancy is hard enough, without being belted by the tax man. Picture: Shutterstock

The tax treatment is very different either side of 65.

Just to be clear, what we are talking about are specific REDUNDANCY PAYMENTS. These are separate from superannuation and a range of other exit payments.

Read more from John Cameron: Are low interest rates hurting your retirement?

Broadly speaking, a redundancy payment is a specific extra payment that is made when an employee's job has been abolished and that person is no longer required. Redundancies can be either voluntary, or not.

Back to the main topic – the tax treatment of redundancy payments.

Genuine redundancy payments receive generous tax concessions in the form of a tax-free amount – if you are under 65.

The amount that is tax free depends on your years of service with that employer, and is calculated as follows: $10,155 + $5078 for each year of service.

Thus, somebody who has 10 years of service will be able to receive up to $60,935, totally free of tax. Naturally, there is a limit on how much you can get tax free. If the formula produces an answer above $200,000, then the limit will be $200,000. However, you will need more than 37 years service to reach the maximum. In that case, you really would qualify as a “long-term employee.”

Please note, the amount you are entitled to will depend on the arrangements your employer has in place to cover redundancies. You may receive more or less than the tax-free amount.

If you receive more than the tax-free amount, the excess will be treated as an Eligible Termination Payment (ETP for short).

Here is the catch! Anybody aged 65 or over, who receives a redundancy payment, DOES NOT QUALIFY FOR THE TAX-FREE AMOUNT. It is all treated as an ETP.

ETPs are taxed via a special formula and the amount you pay depends on your circumstances. The tax rate can be up to the top personal rate.

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