REDUNDANCY Tax concessions on payments

On being shown the door, an unwanted employee is likely to be paid accrued salary, entitlements to unused holiday pay and long-service leave, and possibly a redundancy payment.

Accrued salary is assessed in the normal way and accrued annual leave paid in respect of service on or after 18 August 1993 is fully assessable.

A redundancy payment has to be for a genuine reduction in a company’s staffing for part of it to be tax-free. This tax-free amount is indexed annually, and the amount for the year ended 30 June 2009 is $7,350 plus $3,676 for each whole year in the period, or the sum of periods, of employment to which the payment relates.

There will also only be genuine redundancy if the employee is dismissed. An employee is dismissed notwithstanding their electing to accept redundancy – for example, where an employer makes redundancy offers to groups of employees generally.

Payments made under an early retirement scheme may also be tax-free.

A scheme is an early retirement scheme if it provides for the termination of the services of a class of persons – for example, where an employer wants to replace employees who have particular skills with those of different skills.

As with amounts paid on a genuine redundancy, part of the amount paid to retiring employees will be tax-free.

A more adventuresome way of reducing tax is for the employer, instead of making a payment to the employee, to make an additional contribution to a superannuation fund for the benefit of the employee (a form of salary sacrifice).

Employers can gain tax deductions for lump-sum amounts paid as accrued salary and leave entitlements, and for amounts paid for redundancy.