The redundancy tax credit
What is it?
Currently, income earners can be overtaxed when their redundancy payments push them into a higher tax bracket.
If these payments are taxed at a higher tax rate, without taking into consideration your personal tax rates before and after redundancy, you may be over taxed.
The government has passed legislation to make taxing redundancy payments fairer to people who are pushed into a higher tax bracket when they receive the lump sum payment.
A simple tax rebate (the redundancy tax credit) has been introduced that will apply to redundancy payments paid on or after 1 December 2006.
Who can apply?
The redundancy tax credit is generally allowed on a redundancy payment that is:
- paid to an employee whose employment is terminated because the position is surplus to the requirements of the person's employer, and
- compensation for the person's loss of employment.
Who cannot apply?
Some payments do not qualify for the redundancy tax credit.
The redundancy tax credit is not allowed for a payment for:
- retirement from employment
- loss of seasonal employment arising from a normal seasonal work cycle
- a contract of employment for a fixed term, or for the duration of a project
- employment for a period following notice of termination of employment
- a redundancy payment paid, directly or indirectly, by an employer who is "associated" (see below) or related to the employee.
Associated rules
The tax credit 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 tax credit 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
- a trustee to an employee who is also a beneficiary or a settlor of the trust.
See also
Date published: 08 Jun 2009
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