The federal government has moved to make the tax treatment of redundancies and early retirement payments consistent for all individuals.
The change relates to situations where individuals have received a payout as the result of retiring or resigning earlier than expected due to a scheme implemented by their employer or have had to take a redundancy payment because their job has been abolished.
A tax-free component is included with either of these types of payments calculated with regard to the length of service with that employer.
An anomaly currently exists as only people who receive an early retirement payment or redundancy under the age of 65 can take advantage of this tax-free component.
To correct this set of circumstances, the government has aligned genuine redundancy and early retirement payments with the age pension qualifying age from 1 July 2019. At this date the age pension qualifying age will be 66 and will increase to 67 on 1 July 2023.
“This change means that all individuals aged below the age pension qualifying age will be able to receive a tax-free component on the payment they receive from their employer in these circumstances,” Treasurer Josh Frydenberg said in a statement.
The government estimates a person who is 65 with 10 years of service to the employer and receives a redundancy payment of $100,000 would currently incur tax of $15,000, seeing they would not be eligible for the tax-free component.
Under the new arrangement, the individual’s tax liability on the redundancy payment would be $5640.
“Not only will this ensure older Australians keep more of the money they’ve earned, it will also support workforce participation by removing a barrier that may have prevented some from working longer,” Frydenberg said.