Genuine Redundancy Payments: What Employers and Employees Need to Know
Employment & Tax Update
When an employee's employment ends because their position is genuinely no longer required, the payment made by the employer may qualify as a genuine redundancy payment for tax purposes.
However, not every termination payment is a genuine redundancy payment. Employers and employees should understand the basic requirements and how different payments are reported.
What Is a Genuine Redundancy?
A genuine redundancy generally occurs when an employer no longer requires an employee's job to be performed by anyone because of changes in the business.
For example, redundancy may arise because a business:
- restructures or reorganises;
- reduces its operations;
- introduces new technology;
- closes or relocates part or all of the business; or
- no longer requires a particular position.
The focus is on the job becoming unnecessary, rather than simply the employer wanting to terminate a particular employee. Fair Work requirements, including applicable consultation and redeployment requirements, also need to be considered.
For tax purposes, the ATO also distinguishes a genuine redundancy from other types of termination. For example, a payment arising from a voluntary resignation, normal retirement or termination for disciplinary or performance reasons will generally not qualify as a genuine redundancy payment.
Redundancy Does Not Mean Every Final Payment Is a Redundancy Payment
When an employee leaves because of redundancy, the final payment may contain several different components.
For example, an employee may receive:
- a genuine redundancy payment;
- payment for unused annual leave;
- payment for unused long service leave;
- salary or wages up to the termination date; and
These amounts can have different tax and reporting treatment.
Summary of Common Reporting Treatment
| Payment | STP / Income Statement reporting |
|---|---|
| Genuine redundancy payment — tax-free component | Lump Sum D |
| Unused annual leave paid on genuine redundancy | Lump Sum A – Type R |
| Unused long service leave paid on genuine redundancy | Lump Sum A – Type R |
| Salary/wages up to termination date | Gross payments |
| ETP component of redundancy above the tax-free limit | ETP – Type R |
Employers Should Keep Proper Records
Employers should keep records supporting the reason for the redundancy and the payments made to the employee.
This may include:
- the business reason for the restructure or redundancy;
- correspondence with the employee;
- consultation records where applicable;
- calculations of redundancy and other final entitlements; and
- payroll records showing how each payment was reported.
For workplace law purposes, employers should also check whether redundancy pay is required under the National Employment Standards, an award or an enterprise agreement. Not every employee is entitled to redundancy pay under the NES, particularly employees of small business employers or employees falling within specific exceptions.
A Simple Checklist
Before processing a redundancy payment, employers should ask:
- Is the employee's job genuinely no longer required?
- Has the appropriate consultation process been followed?
- Has any reasonable redeployment opportunity been considered?
- What components make up the employee's final payment?
- Has each component been correctly classified for payroll and tax reporting?
- Are the relevant employment records and calculations documented?
For employees, it is also important to understand what each component of the final payment represents and to check that the payment and reporting are consistent with the circumstances of the termination.
Ace Solutions Accounting & Taxation
This article provides general information only and does not constitute legal, accounting, taxation or financial advice. Employers and employees should obtain professional advice relevant to their particular circumstances.