The purpose of this article is to discuss some of the issues faced by those that have experienced
a redundancy, whether it is a voluntary redundancy or not. It can be a very difficult and challenging time. We hope that some part of what you read in this article is beneficial and of service to you.
A redundancy may occur for a number of reasons such as:
. closure of a business
. introduction of new technology
. an internal re-structure
. outsourcing, or
. sale or merger of business
Being made redundant is not part of anyone’s ideal career path! It is however something that will happen to many people over the course of their working lives. Unfortunately the current economic circumstances mean that many more Australian workers are experiencing the dislocation, uncertainty and confusion that come with losing your job.
There is obviously no ‘right’ response to dealing with redundancy. However, what is clear is that the period after being made redundant should be characterised by confident and level-headed decision making. If you can manage to make the right financial and professional decisions, redundancy can be successfully turned from bust to boom! To do this you will have to analyse:
. Your current financial position
. The main questions and issues that you are faced with (especially those related to
payments, superannuation, possible government assistance and insurance); and
. Possible strategies for moving beyond redundancy to a secure financial future
The purpose of this article is to briefly outline some of the financial issues related to redundancy and to address some ways in which they can be addressed. Please remember that every situation is unique and that a guide like this can only offer general information. If you need guidance specific to your circumstances it is strongly recommended that you consult a professional financial adviser.
ANALYSE YOUR PERSONAL FINANCIAL NEEDS
Your first step in designing your ‘redundancy strategy’ should be to get the fullest possible picture of your current financial position. Having ready access to this information will greatly assist you in making solid financial decisions. Some of the questions that you should ask yourself are:
. How much money do I need to cover my basic living expenses?
. Have I committed myself to major expenses over the next year?
. How much debt (e.g. home loans, credit card debt) do I have and what does it cost me to service this on a monthly basis?
. How much money do I need to put aside in order to fund a comfortable retirement?
. Am I properly insured?
After you have written down your answer to these questions, you should prioritise your spending commitments (You could perhaps rank them as: Vital, Important and ‘Temporarily Optional’). Doing this will help you to develop the best possible coping strategy until you can move back into full time employment.
DETERMINE THE VALUE OF TERMINATION AND REDUNDANCY
PAYMENTS
There are several kinds of payments that you may receive from your employer when your
employment is terminated due to redundancy. These can be divided into three main categories with specific tax implications for each of them. Each of the three types (Tax-free Redundancy Payments, Employment Termination Payments (ETP) and Other Termination Payments) will be discussed in turn:
Tax Free Redundancy Payments
If the termination of your employment is classed as a ‘bona fide redundancy’ you will be eligible for a tax free redundancy payment that you have to take in cash. The two main criteria for a redundancy being considered bona fide is that you should be under 65 years of age and that you should not be replaced by anybody else.
For the 2010/2011financial year the maximum amount that you can receive is determined using the following formula: $8,126 + $4,064 for every completed year of service. If your total redundancy payment is less than the amount reached by applying the formula, the entire payment will be tax free. If your payment is more than the amount above the tax free
threshold, it will be treated as an Employment Termination Payment.
Employment Termination Payments
It could be that you are entitled to certain Employment Termination Payments (ETPs) upon leaving employment. Some possible examples include: Redundancy payments above the tax free amount, accrued sick leave and ex gratia payments. How this money will be viewed by the Australian Taxation Office depends on how long you have been in employment and what was stipulated in your contract or workplace agreement.
From 1 July 2007, under changes made by the Superannuation Legislation (Amendment) Simplification Act 2007 to superannuation, eligible termination payments are now referred to as employment termination payments (ETPs). Under these superannuation changes ETPs are not able to be rolled-over into superannuation. Transitional arrangements may apply to ETPs made between 1 July 2007 and 30 June 2012 (Source: facs.gov.au).
This topic provides information about the following:
. employment termination payment,
. types of ETPs,
. exemptions and exclusions from ETPs,
. definition of genuine redundancy payment, and
. transitional ETPs and roll-overs.
The rules that apply in each case are the following:
Transitional ETP rules
The main benefit of the transitional rules is that you have the option to receive payment as cash or to have the ETP paid straight into your super fund. Rolling over your payment into your super can of course be a very tax efficient way to maximise your retirement savings and it can also help you qualify for the Newstart Allowance (or increase the amount that you receive under the scheme). You should keep in mind however that any funds paid into your super fund have to stay there until you reach age 55. Therefore it is not the best option if you need ready access to the funds. The main benefits of electing to have your ETP paid into your super are the following:
. In most cases you will pay less tax if it is paid directly into your super. (For example: If you are under 55 the tax rates for cash payments will likely range from 31.5% to 46.5%, whereas payments into a super fund will be taxed at 15% for the first $1 million).
. Investment earnings in super funds are taxed at a lower rate than those earned on the ‘open market’ (15% instead of a rate up to the top marginal rate of 46.5%)!
Non-transitional ETP rules
Payments under the non-transitional rules have to be received as cash (after deduction of relevant taxes) and you don’t have the option of having the funds paid directly into your super fund. This means that you cannot make use of the initial lower tax payment when paying into a super fund that is available under the transitional rules. You can, however, still elect to pay some or all of the funds into your super fund as a way to boost your nest egg and to make use of the lower rate (15%) at which investment earnings in super funds are taxed. You should remember that all funds you place into a super fund will be ‘locked in’ until you reach the age of 55.
The rates at which employment termination payments are taxed under the non transitional rules are dependent on your ‘preservation’ age as follows:
. If you are under preservation age: up to the cap taxed at 31.5%, thereafter 46.5%
. If you are over preservation age: up to the cap taxed at 16.5%, thereafter 46.5%
Income year Cap
2011/2012 $165,000
2010/2011 $160,000
2009/2010 $150,000
2008/2009 $145,000
Preservation Age and General Termination Payments
Most employees are entitled to at least some of the following payments when leaving an employer:
. Accrued Annual Leave: The full amount is taxable at 31.5%.
. Accrued Long Service Leave: If the service was before 16/08/1978, 5% of the amount will be taxed at your marginal tax rate. If your service was after this date the full amount will be subject to the maximum tax rate of 31.5%.
. Final Salary: The full amount will be taxable under your marginal rate.The tax for most of the payments listed above will be deducted and paid to the tax office by your employer. The exception is payment for long service leave for service before 16/08/1978. In this case you will have to declare your liability on your tax return.
General termination payments could be used to fund your immediate needs or they could be paid into your superannuation fund as a way of capitalising on the lower tax rates on the proceeds of investments in super funds.
Making the correct decisions about what to do with the payments you receive when leaving your employer can be quite difficult and complex. It would therefore be more than worth your while to discuss all your options with a financial adviser.
Preservation age:
If you were born Age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
After 30 June 1964 60
DECIDE ON THE BEST STRATEGY FOR MANAGING YOUR
SUPERANNUATION
Making the right decisions about what to with your superannuation should be very high on your list of priorities after being made redundant. Some of the things that you will have to think about are whether:
. You can remain with your current superannuation fund
. You can switch to another superannuation fund
. You can start an income stream investment
. You can have some, or all, of your superannuation paid out as a lump sum
The first thing that you need to do before you can make any decisions is to verify the current status of your super, as this will determine what you will be allowed to do with it.
Some possible benefit scenarios are:
Preserved Benefit: Your will money will have to remain in a super fund (your current one or
another eligible fund). Funds will only be released if you meet a condition of release (e.g. reaching your ‘preservation age’, severe financial hardship, permanently leaving Australia, terminal illness etc.).
Restricted Non-Preserved Benefit: Most funds in this category were commenced before 1 July 1999. If your employer contributed to the fund, it will become ‘unrestricted non-preserved’ upon the termination of your employment. Otherwise it will be treated in the same way as a preserved benefit fund.
Unrestricted Non-Preserved Benefit: This is the scenario where you have the most options. Your money can stay in your current fund, be rolled over into another eligible fund, be paid out as a lump sum or be used to start an income stream investment.
Understanding the status of your fund will help you decide whether or not to pursue one of available options.
Taking your money out as a lump sum
A major factor in deciding whether to cash in your super is how much tax you will pay when doing so. The answer is, that the longer you leave it in the fund, the less money will go to the taxman. If you are under 55 and taking the cash out under a special condition of release you will pay 21.5% tax. If you are between 55 and 60 you will not have to pay tax on the first $165,000 and 16.5% thereafter. After age 60 you will not have to pay any tax.
Keeping your money in your super fund
The main benefits of keeping your money in super is that any investment earnings will be taxed at a much lower rate (15%) than you would have to pay in the ‘open market’ (to the top marginal rate of 46.5%). If you can manage to keep your money in super until after age 60 you will not have to pay any lump sum tax. These are obviously significant benefits. If you do decide to keep your funds in super, the next major question becomes whether you will stay with your current fund or whether you should join another eligible fund.
Placing your funds into a different super fund
It is sometimes the case that you have virtually no choice in having to roll over your super into a new fund (this is especially the case with employer sponsored funds where you have to be currently employed by a company to be eligible for membership). In other cases it would simply make more sense to move to a new fund (e.g. where you could expect a better return on investment, or when you consolidate several funds into one in order to save on administration and fees). Of course, it would be prudent to spend some time researching the best new ‘home’ for your super.
Some of the things that you should consider are:
. Is the fund administered by a provider with a good track record and solid management systems?
. Does the fund offer a variety of investment options?
. Is the fund proactive in communicating and does it provide ready access to information?
Using your super to commence an income stream investment
If some, or all, of your super is available to you as a lump sum income you could benefit from
commencing an income stream investment (e.g. an account based pension). The main benefits associated with this option are:
. The deferment or elimination of lump sum tax.
. The possibility of making use of tax-free earnings within a pension fund (e.g. If you receive income
. payments from an income stream commenced from a taxed super fund, it will be tax free after age 60) A possible 15% tax offset if you are aged between 55 and 59.
INVESTIGATE THE POSSIBILITY OF GOVERNMENT ASSISTANCE
Newstart is a government assistance program with the aim of helping those who are actively
looking for work to meet their living expenses. You may be eligible for assistance from Newstart if you are:
. At least 21 and under the Age Pension age
. Actively looking for paid work
. Prepared to enter into an activity agreement
. Not involved in industrial action
How much you receive from Newstart will be determined by several factors. Some of these are:
. Whether you are single or married
. Your age
. Whether you have any children
. The value of your income and assets (This is determined through income and asset testing)
If you apply for Newstart your payment will generally start after the ‘ordinary waiting period’ (7 days).
You may not receive Newstart Allowance straight away if you have the following funds available to spend:
. $3,000 if you are single
. $6,000 if you are a couple, or single with dependants
However, it could be the case that if you received leave entitlements or time related
redundancy payments, you will also have to wait for an ‘income maintenance’ period to run out. If you have liquid assets of more than $6,000 (if you have a partner or dependent children) or $3,000 (if you are single) you will also have to wait for 13 weeks under the ‘liquid assets waiting period’ before payments commence. The last two waiting periods can run concurrently.
The way in which you manage your redundancy payments will have a definite impact on your eligibility for Newstart. Any payments that you cash in or invest outside of super will be assessed under the income and assets tests. This will not be the case if you leave the money in your superannuation fund. As a Newstart Allowance customer you can earn up to $62 per fortnight before tax before your payment is affected. Income between $62 and $250 reduces your fortnightly payment by 50 cents in the dollar. Income above $250 reduces your payment by 60 cents in the dollar. Partner income which exceeds the cut-out point also reduces your payment by 60 cents in the dollar.
If you want to make use of Newstart your first port of call should be Centrelink as they will be able to supply you with all the necessary information on the program.
REVIEW YOUR PERSONAL INSURANCE NEEDS
Leaving your current employer could mean that you cease to be eligible for certain types of
insurance directly related to your employment. Examples of this can include:
. Life, Total and Permanent Disability (TPD) and income protection cover linked to a super fund into which your employer was making payments.
. Sick leave or insurance provided by your employer that was not part of any super fund.
After determining whether you would be losing any insurance benefits you should proceed to do a broader analysis of your insurance position to determine whether you are adequately covered. The meaning of ‘adequate’ in your case will most likely be influenced by your answers to the following questions:
. Do you have family or other dependants?
. Do you have significant amounts of debt?
. How much ‘backup finance’ do you have available to draw upon in case of illness or serious injury?
Designing a new insurance portfolio in response to your assessment of your current situation can be quite complex and you would be well advised to get some professional advice in doing so. There are however a few basic considerations that you should take into account like:
. It is often possible to purchase insurance cover within a super fund. The main benefits of doing this are that you can make significant tax savings and, under certain conditions, premiums can be deducted from your super account balance. This means that you can remain adequately insured even when faced with a severely reduced cash flow.
. It might be possible to simply continue with the insurance arrangements that were in place when you were employed. Your super fund manager will be able to inform you whether a continuation option is available in your case.
Redundancy pay Australia
A genuine redundancy payment is a payment that represents the amount that exceeds what that person who has been made redundant would have received had he voluntarily resigned in other circumstances. “Genuine redundancy” is defined by s 389 of the Fair Work Act.
That definition extends beyond the usual meaning of redundancy, and brings in considerations of whether the employer complied with any obligation to consult, and whether the employee could have been redeployed to another position.
A dismissal will only be a genuine redundancy for the purposes of the unfair dismissal provisions of the Fair Work Act where all 3 conditions is satisfied and non-compliance with s 389 does not automatically render a dismissal “unfair”:
1. The employer does not need the employee’s to work or by anyone because of changes in the operational requirements of the employer’s enterprise. Importance is placed on whether employee’s position continues to exist, not whether the duties which are formally part of that position are still required: Ulan Coal Mines Limited v Howarth [2010] FWAFB 3488.
2. The employer complies with any obligation to consult about the redundancy prescribed by a modern award, enterprise agreement, transitional instrument or Division 2B State instrument that applies to the employment (Transitional Provisions and Consequential Amendments).
3. It is “reasonable in all the circumstances” for the employee not to be redeployed within the employer’s enterprise or the enterprise of any associated entity (as defined in s 50AAA of the Corporations Act 2001). There can be no absolute rules about what will or will not constitute an employer’s obligations (Sriharsha Manoor v United Petroleum Pty Ltd [2010] FWA 2571; Kristina Iannello v Motor Solutions Australia Pty Ltd [2010] 3125).
The minimum redundancy payment
Your employer is required to offer you redeployment opportunities before proceeding with retrenchment. While there have been government guidelines on appropriate levels of pay for people being retrenched and many employers have paid their employees fairly, the National Employment Standard sets mandatory minimum redundancy payments for employees in Australian workplaces, starting January 2010.
The minimum redundancy payment under Fair Work Act is based on your years of service:
. 1-4 years in job: 4 weeks severance pay
. 4-5 years in job: 8 weeks severance pay
. 9-10 years in job:16 weeks severance pay.
The National Employment Standard has the following minimum redundancy payment based on your years of service:
. Up to 1 year in a job: 1 week
. 1 – 3 years in a job: 2 weeks
. – 5 years in a job: 3 weeks
. More than 5 years in a job: 4 weeks.
. If you are over 45 years of age with a minimum of 2 years service, the period is increased by 1 week.
You may also have an entitlement to redundancy depending on an award, an enterprise agreement, an Australian Workplace Agreement (AWA) or other statutory agreement, a contract of employment, or a company policy. If you are employed by a partnership or a state government department, you may also qualify for a redundancy pay under state laws.
Under the National Employment Standards you may not get redundancy if you are:
. employee of a business which has fewer than 15 employees
. employed on a casual basis
. employed on a fixed term contract
. where the termination results from the ‘ordinary and customary turnover of labour’, and
. apprentice.
Under the National Employment Standards you should get the following pay:
Less than 1 year Nil
1 year (less than 2 years) 4
2 years (less than 3 years) 6
3 years (less than 4 years) 7
4 years (less than 5 years) 8
5 years (less than 6 years) 10
6 years (less than 7 years) 11
7 years (less than 8 years) 13
8 years (less than 9 years) 14
9 years (less than 10 years) 16
10 years and over 12
Conclusion
It should be clear from all of the above that with redundancy come serious financial decisions. The way in which you make those decisions will have a definite impact on your financial future. Therefore, do your best to make them in an informed and well thought out way and make sure that you get the best possible advice as you consider the alternatives open to you. Doing so could make your transition to a new position just that little bit easier, as it will allow you to concentrate on taking the next step in your career rather than having to worry constantly about your long term financial future.
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