Govt acts to close redundancy pay tax anomaly

Superannuation funds will need to take into account proposed legislative changes intended to close a legislative loophole which acted to disadvantage those aged over 65 from accessing concessional tax treatment when they are made redundant.

The Treasury opened a consultation around the legislation, the Treasury Laws Amendment (2019 Measures) Bill, which would actually seek to recognise the changes to the pension access age and the fact that people are working longer.

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In doing so, the legislation closed a loophole which meant that people aged over 65 who were genuinely made redundant could not access the same beneficial tax treatment of their redundancy payments as younger workers.

The amendment effectively reflected the fact that access to concessional tax treatment of redundancy payments needs to take account of the fact that the Government has increased pension access age from 65 to 66 for those born after 1 January, 1954, 66 and six months for those born from 1 July, 1955 to 31 December, 1956 and 67 for those born after 1 January, 1957.

The Treasury’s explanatory memorandum attaching to the legislation cited the following case-study:

“Eloise is dismissed from her position as Senior Executive Global Director of Shared Worldwide Procurement at XYZ Company on 30 June 2023. This follows, a strategic restructure in which the company’s Board decided to withdraw from the shared procurement model. Eloise’s skills are considered not to be suited for other roles in the company.

“Eloise was born on 1 February 1957 and is 66 years and five months old at the date of dismissal. XYZ Company pays Eloise a termination payment upon dismissal of which $50,000 is a genuine redundancy payment.

“The $50,000 amount is a genuine redundancy payment as Eloise has not reached the pension age of 67 years at the date of termination of her employment on 30 June 2023.

“As a result, Eloise is not subject to tax on the tax-free component of the payment (which, depending on her period of service, may be the entire payment). Further, to the extent the payment is not solely made up of a tax free component, Eloise is entitled to a tax offset to ensure that the rate of income tax payable on the taxable component of the payment does not exceed the relevant threshold specified in Division 82.”