Advice now could save you even more pain later....
Sadly, with the economy as it is, many employees that may have felt they were in secure well paid jobs are now being faced with the daunting proposition of being made redundant.
The period immediately following a redundancy, as traumatic as it may be, can be both an opportunity and a threat.
Depending on your period of employment, redundancy can bring with it a large sum of payment which can pose a problem. Not only is it your last payment from your employer and your cash flow needs to be managed until you regain employment, but it can have further issues that also need to be considered.
Some presented with a large payment venture into the world of self employment by looking to buy or set up a business within their own trade or profession or in something that appears within their skillset. Often this can prove to be disastrous. It is extremely important to obtain accounting and legal advice before diving head first into this space because if your get it wrong the results could be catastrophic.
From a financial planning point of view, the receipt of a large payment can represent opportunities that are also worthy of consideration.
It can raise the question of do I use the lump sum to pay off my home loan or other investment loans. It is critical to get this right to ensure that your ongoing tax treatment of interest paid on any borrowings remains favourable to you.
Some also look to contribute additional funds to their superannuation. Differing tax treatment can be achieved by considering this in advance of receiving the payment. It is important that you obtain advice on this prior to receiving the redundancy payment.
A genuine redundancy payment is a payment made to you as an employee who is dismissed because the job you were doing has been abolished.
Depending on your employment conditions, (for example, amounts your employer is required to pay under the industrial agreement or employment contract), a genuine redundancy payment may include:
- Payment in lieu of notice
- Severance payment of a number of weeks' pay for each year of service
- A gratuity of 'golden handshake'
The following payments are not included in a genuine redundancy payment:
- Salary, wages or allowances owing to you for work done or leave already taken for work completed
- Lump sum payments of unused long service leave paid on termination of employment under a formal arrangement
- Payments made in lieu of superannuation benefits
Any payments that meet the conditions of a genuine redundancy are tax free up to a limit based on your years of service with your employer. We can provide you with further guidance about this and how it is calculated. The tax-free limit is a flat dollar amount plus an amount for each year of completed service in your period of employment with your employer. Indexation changes the tax-free limit on 1 July each year.
When an employee leaves work or changes jobs, they may receive payments that are taxed differently and in some cases on a concessional basis. The payment types and tax treatment of each payment will depend on how your employment was terminated - for example, whether you resigned or whether your job became redundant.
An Employment Termination Payment (ETP) is a payment given to an employee, or another person, as a result of the termination of the employee's job. To be an ETP (and receive concessional tax treatment) the payment must generally be made within 12 months of termination. Payments made outside the 12-month period will be included in your assessable income and will be taxed at your marginal tax rates. The 12-month rule does not apply to the taxable component of genuine redundancy payments and early retirement scheme payments.
What if you are older and re-employment prospects are looking unlikely?
The question that then raises its head is, should you access your superannuation?
You can access your super:
- When you turn 65 (even if you haven't retired), or
- When you reach preservation age and retire, or
- Under what is know as the transition to Retirement rules, while continuing to work.
There is very limited circumstances where you can access your Super savings early. These circumstances are mainly related to specific medical conditions or severe financial hardship. It is difficult to meet these conditions but again, please look to us for advice if you would like to investigate this option.
Your 'preservation' age is not the same as your 'pension' age. Your preservation age is the age at which you can access your super if you are retired (or have started a transition to a retirement income stream). For some this can be as low as 55 years of age.
Your preservation age depends on when you were born and we can provide you with specific details about your eligibility to access your Superannuation savings.