Payroll laws in Australia are designed to protect employers and employees,
but they can pose challenges to your business if you are unfamiliar with how
they work.
Redundancy pay is one facet of employment that will likely come up if you have
employees working in Australia. What is redundancy pay? Does redundancy pay
get taxed in Australia? Read on to learn more.
What is redundancy pay?
When an employer no longer needs an existing employee to perform their role,
that employee is considered redundant and is entitled to redundancy pay. This
effectively plays the same role as severance pay in the United States, when
employers provide employees with a sum of money and (sometimes) benefits
following a lay-off or other termination.
In Australia, employees may be made redundant for a variety of reasons,
including:
- A slowdown in business
- Mergers or takeovers
- Business restructuring or reorganizing
- Implementation of new technologies that replace current employees
- Business relocation
Not every employee has an entitlement to a redundancy payment in Australia.
Eligibility requirements and the actual amount paid depend on a variety of
factors, including:
- Length of employment
- Employer’s business size
- Employer’s ability to pay the amount owed
- The exact wording in any employment contract, award or enterprise agreement
For employees that are eligible, the standard redundancy pay is equivalent to
their ordinary rate—not including bonuses, commissions or overtime—and depends
on the length of employment. For example, an employee that has worked with a
company between one and two years will receive four weeks of pay at their
regular rate. An employee that has worked at a company for at least 10 years
will receive 12 weeks of pay.
When is redundancy pay not required?
Businesses with less than 15 employees—including the employer and the
redundant employee—at the time of dismissal are not required to pay
redundancy. There are some exceptions, like if an employment contract
specifically notes a redundancy payment.
In other cases, an employer may offer an employee another job or position
within the company. If the employee refuses, the employer may reduce the
redundancy pay, sometimes even down to zero.
Redundancy payments are generally not required at the end of an agreed
contract period for fixed-term contract positions. However, fixed-term contract redundancy rights
in Australia may allow for some form of payment for early or unfair dismissals
of fixed-term contracts.
Another exception is an employee that has worked at a company for less than a
year. An employer is not required to pay redundancy for an employee of 12
months or less.
Employers that are unable to pay redundancy can also apply to the Fair Work
Commission to have the amount reduced or waived entirely. However, employers
that have gone bankrupt or entered liquidation may still have to pay employees
unpaid entitlements, including redundancy payment.
Ownership changes
Ownership changes can come with unique challenges. If an employee’s role
becomes redundant due to an ownership change, but the new owner hires the
employee, that employee will not receive redundancy pay. In this situation,
the employee is not considered to have been terminated from their previous
position, even if they are technically employed by a new organization.
However, in some instances, the new employer can choose not to recognize an
employee’s previous service period. This would require the previous employer
to then provide redundancy pay.
Genuine vs. non-genuine redundancy payment
Taxes on redundancy payments rely on whether the payment was genuine or non-
genuine. A genuine redundancy is payment provided to an employee whose
position is abolished, resulting in termination. In order for a redundancy to
be considered genuine, the employer must consult with the employee and
determine eligibility based on the registered agreement terms.
Non-genuine redundancies vary, but can include:
- Dismissals when an employee reaches retirement age
- An employee leaving voluntarily
- An employee leaving once their contract has completed
- Dismissal for any disciplinary or inefficiency reasons
Furthermore, a redundancy is considered non-genuine if the employer terminates
an employee but still needs that role to be filled by someone. If the employer
could have reasonably given the employee another job at a different position
in the business or associated entity, the redundancy is not considered
genuine.
Determining whether the redundancy is genuine is important for tax reasons,
but it’s also necessary to protect employers and employees. With a non-genuine
redundancy, an employee may potentially succeed in an unfair dismissal claim,
which can be even more costly and time-consuming for the employer.
Taxes on redundancy payments
Genuine redundancy payments are tax-free up to a certain limit that is
determined by an employee’s years of employment. That limit is a flat dollar
amount combined with an additional amount for each year of employment. The
employer reports this tax-free amount as a lump sum payment on the employee’s
income statement.
Above that tax limit, the payment summary can be concessionally taxed as an
employment termination payment (ETP). For any redundancy amount above a
certain cap, the payment is taxed at the employee’s typical marginal tax rate.
Non-genuine redundancy payments are not tax-free. They are taxed as part of an
employee’s ETP, but if the amount does not exceed certain caps, the payment is
considered taxable income. Although, it receives a lower rate than normal.
Generally with concessional tax treatment, the payment is taxed at a much
lower rate than an employee’s marginal tax rate. Redundancy payments are
concessionally taxed if they are received within 12 months of the employee’s
termination. Otherwise, the payment is considered part of the employee’s
assessable income, which is then taxed at the normal, marginal rate.
If an employee receives an ETP, the employer is also required to pay out any
unused annual leave. However, this payment is not included in the employee’s
ETP and is separately recorded on their income statement. The lump sum payment
for unused annual leave can be concessionally taxed.
Navigating tax and labor laws as an employer in Australia can be overwhelming
and confusing, and the stakes are high as any misunderstanding of those laws
can lead to litigation and costly proceedings.
Working with an employer of record services provider can take the pressure off of
navigating foreign tax law by providing your organization with the resources and
personnel necessary to manage international employment.
Learn more about how our employer of record service in Australia can support your
employment compliance and tax needs.
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