Other policy matters: Tax relief for redundancy payments

Tax relief for redundancy payments

Sections KC 6, OB 1 and OD 8(3) of the Income Tax Act 2004; subpart ML and sections YA 1 and YB 20 of the Income Tax Act 2007; and section 41B of the Tax Administration Act 1994

The Income Tax Act 2004, Income Tax Act 2007, and the Tax Administration Act 1994 have been amended to provide a new rebate (renamed "tax credit" in the Income Tax Act 2007) for redundancy payments. The rebate is a flat rate of six cents in the dollar, capped at the first $60,000 of redundancy payments in relation to each redundancy event. The rebate applies retrospectively to redundancy payments paid on or after 1 December 2006.

Background

Before this amendment, depending on the level of a person's earnings, receipt of a redundancy payment arguably could result in over-taxation when the redundancy payment pushed the person's total earnings over an income threshold and therefore onto a higher marginal tax rate. There was no tax relief available for redundancy payments.

Key feature

A new definition of "redundancy payment" has been included in legislation. A definition is required so that redundancy payments qualifying for the rebate relate to payments which arise from a genuine redundancy and have been subject to the PAYE rules.

Claiming the rebate

The process for obtaining the rebate is straightforward. Recipients of redundancy payments simply calculate the rebate as a separate claimable and refundable amount, similar to the current rebates for charitable donations. A new redundancy rebate form is available for rebate claims from April 2008.

A rebate claim may be made following receipt of the redundancy payment. There is no requirement to wait until the end of the tax year to claim a rebate, or any requirement to file any income tax return as a consequence of receiving a redundancy payment and submitting a rebate claim. However, there is a requirement to submit evidence to support each redundancy payment forming the basis of each rebate claim.

Evidence to support the redundancy payment and rebate claim is consistent with other rebates available outside the income tax return filing system. Providing supporting evidence for rebates is an essential factor in maintaining the integrity of the tax system and the tax base.

Evidence to support the rebate claim must be written verification of any information the Commissioner requires, including:

• the amount of the redundancy payment for which a rebate is claimed;
• the name of the payer of the redundancy payment; and
• the date on which the redundancy payment was made.

The written verification which includes the above details must be in a document signed by the payer of the redundancy payment or other form satisfactory to the Commissioner.

In circumstances when being made redundant or receiving an employment termination payment is predictable or may be a natural consequence of particular positions or industries, these payments will not qualify for the rebate. Section KC 6(3) of the Income Tax Act 2004 (subpart ML of the Income Tax Act 2007) provides a list of redundancy payments for which a rebate is not allowed. A rebate is not allowed for a redundancy payment:

• relating to retirement from employment;
• relating to loss of seasonal employment if the loss arises from the normal seasonal work cycle;
• relating to a contract of employment for a fixed term or for the duration of a project;
• relating to employment for a period following notice of termination of employment;
• paid to a director of a company by a company or by a person associated with the company under section OD 8(3) of the Income Tax Act 2004 (section YB 20 of the Income Tax Act 2007);
• paid to a person by another person associated with the person under section OD 8(3) of the Income Tax Act 2004 (section YB 20 of the Income Tax Act 2007); or
• paid by a person to an employee who has been paid a redundancy payment by another person associated with the person under section OD 8(3) of the Income Tax Act 2004 (section YB 20 of the Income Tax Act 2007).

The rebate is not allowed for a redundancy payment paid, directly or indirectly, by a person who is "associated" or related to you. Payments that may not qualify for the rebate include redundancy payments paid directly or indirectly by:

• a company to its director, or to a shareholder-employee;
• an employer who is a close relative of the employee, or spouse, or civil union or de facto partner;
• a partnership to any of its partners; or
• a trustee to an employee who is also a beneficiary or a settlor of the trust.

Application date

The new redundancy rebate will apply to all redundancy payments made on or after 1 December 2006.

Date published: 28 Apr 2008

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