Making contributions to superannuation can provide you with tax concessions and may result in you effectively paying less tax on your redundancy payment.
Rolling a redundancy payment into super was once a common strategy; however, this is no longer the case.
Your redundancy payment will consist of a number of components, which will determine the level of tax you pay and allow you to determine if you can or should put any of your redundancy into super.
The idea of putting redundancy payments into super is to reduce tax.
Can I Put Redundancy Into Super?
Theoretically, yes, you can put your redundancy payment into superannuation. But it cannot be rolled over to super.
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What’s important is putting it into super in the correct manner, in order to abide by the contribution rules.
Due to rolling redundancy payments into super no longer being permitted, you will need to consider how you can contribute your redundancy payment into super under the super contribution rules.
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It is important to first calculate the components of your redundancy payment and any tax that may be payable.
This will determine if there is any benefit in contributing all or some of your redundancy to super.
Redundancy Payment Components
A genuine redundancy payment is generally calculated based on your years of service, salary, unused leave and unused long-service leave.
Redundancy payments are also known as termination payments and can be categorised as Employment Termination Payment (ETP) or non-ETPs.
Redundancy payments can include both an ETP and non-ETP component.
Ultimately, the components of redundancy payments are taxed in the following manner.
|Unused Annual Leave||Individual Tax Rate (generally up to 30%)|
|Unused Long-service Leave (accrued up to 15 Aug 1978)||5% taxed at ITR (plus Medicare Levy)|
|Unused Long-service Leave (accrued from 16 Aug 1978)||30% (plus Medicare Levy)|
|Employment Termination Payments – Tax Free Component||0%|
|Employment Termination Payments – Taxable Component up to $205 000||30% (plus Medicare)|
|Employment Termination Payments – Taxable Component over $205 000||45% (plus Medicare)|
How Can I Put Redundancy Into Super?
There are two ways that you can put a redundancy payment into super.
Rolling redundancy payments into super is not an option, but contributing them to super may be.
Contributing redundancy payments to super can simply be done using the after-tax amount received as the termination payment.
This can be contributed as a concessional or non-concessional contribution, assuming you meet the age or work test requirements for being able to make the contributions, as well as the standard conditions associated with concessional and non-concessional contributions.
Therefore, once the after-tax redundancy payment is paid to you, you can contribute it to super as a non-concessional contribution up to the non-concessional contribution cap of $100,000 per person per financial year.
If under age 65, you can bring-forward up to two years’ worth of the cap, allowing you to contribute $300,000 over three financial years, without being restricted by the annual cap.
Alternatively, you can put your redundancy payment into super as a personal concessional contribution.
This is now possible even if you are an employee, due to the removal of the 10% maximum earnings condition from 1 July 2017.
If you are going to put your redundancy into super as a personal concessional contribution, you need to consider that there is a concessional contribution cap of $25,000 per person per financial year (potentially more, using the carry forward unused concessional cap).
You should be mindful that your total combined concessional contributions do not exceed the concessional contribution cap.
Also, consider the contributions tax on concessional contributions paid into super to calculate the viability of putting your redundancy payment into super.
Superannuation On Redundancy Payments
Mandatory employer superannuation guarantee (SG) payments are required to be paid on ordinary time earnings (OTE).
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Generally, SG contributions are not required to be paid on unused annual leave, long service leave, or sick leave that forms part of a termination payment.
Further, employer SG payments are also not required to be paid on redundancy payments, as per the Fair Work Act 2009 (s119(2) and this tax ruling, which states that redundancy payments are not salary or wages, as they are not a reward for services renedered by an employeee.