Redundancies: getting the basics right

by 27 May 2009

Q. We are currently planning for a moderate number of redundancies. What are the basics we need to consider?

A. Due to the current economic downturn and the changing global economy, re dundancy has become increasingly common within organisations. Redundancy can affect staff and their families both finan cially and emotionally. When retrenching staff, how can organisations ease the impact on their employees?

For some companies, retrenching staff can be an effective way of downsizing their or ganisation and reducing costs. When staff re dundancies are handled well by an organisa tion, a business can operate more efficiently, ensuring staff have a smooth transition to the next step in their career, whilst giving the opportunity to enhance their reputation as an employer who looks after its employees.

When employees receive a redundancy package, there are many financial aspects to consider. For example, the employment payment could be made up of any number of components, such as tax-free and non- tax-free payments, annual and long-service leave entitlements, superannuation and share options.

Tax-free payments consist of any em ployer eligible termination payments (ETPs) that meet the conditions for payments under a bona fide redundancy. These are tax-free up to a certain limit which is based on the number of years the employee has worked for their employer. The tax-free limit is a flat dollar amount, plus an amount for each year of completed service in the employee’s pe riod of employment with their employer (source: Additionally, the tax-free component of the eligible termina tion payment may not need to be included in the employees’ next income tax return.

Non-tax-free payments consist of accrued annual leave, unused long-service leave, un used sick leave, amounts in lieu of notice and rostered days off. Regardless of an employ ee’s age or when their annual leave was ac crued, these components are taxed at 31.5 per cent (in addition to the Medicare levy) when a redundancy occurs.

Redundant employees can contribute to their superannuation with the help of their lump-sum cash payment, however it is im portant to note that the lump-sum payment cannot be rolled directly into an employee’s superannuation account, it must be con tributed as an after-tax contribution. There are exceptions to this rule and it is advisable to speak with a financial planner to discuss spe cific circumstances.

This information may be regarded as gen eral advice. That is, your personal objectives, needs or financial situations were not taken into account when preparing this information. Accordingly, you should consider the ap propriateness of any general advice we have given you – having regard to your own ob jectives, financial situation and needs – be fore acting on it. Where the information re lates to a particular financial product, you should obtain and consider the relevant prod uct disclosure statement before making any decision to purchase that financial product.

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