Q I turned 55 in March this year, I am being terminated from my job on 31 July 14 due to a genuine Redundancy. In addition to my ETP I will receive my salary for the month of July. I am planning to take a break from work until after June 15. For the 2015 tax year will the ETP be taken into account for determining the marginal tax rate applicable to my salary payment for July? If it does than I’m thinking it would be a good idea to salary sacrifice all of my July salary.
A Genuine redundancy payments are tax free up to a prescribed limit based on your years of completed service. The tax free limit is determined by a base tax free amount and your number of years of completed service. For the 2014/15 tax year, the base tax free amount is $9,514 and the service component is $4,758 per year of completed service. As an example, if we assume you have 10 years of completed service, the first $57,094 of your redundancy payment would be tax free. Any amount above this would be taxed as an Employer Termination payment and be subject to tax. If your redundancy payment was less than this, naturally it would all be tax free.
As you are over 55, the first $180,000 the taxable component is taxed at 15% plus Medicare levy. Amounts over this are taxed at 45%. If you were under 55, the first $180,000 of the taxable component is taxed at 30% plus Medicare levy thereafter 45%. Accordingly your Redundancy payment will have no bearing on your Marginal Tax rate.
In addition to your Redundancy payment, you will most likely receive a payment for unused Annual leave and Long Service Leave. As the termination payment arises from genuine redundancy, Annual Leave payments are taxed at 30% plus Medicare Levy. Accrued Long Service Leave is taxed at the same rate unless it was accrued prior to 15 August 1978 (unlikely). If this is the case, 5% of the pre 15 August 1978 proportion of your benefit would be taxed at your Marginal tax rate. So unless your service period stretches back that far, your Marginal Tax rate in the year of Redundancy will have no bearing on the tax you will pay on your accrued leave benefits.
You plan to take a break from work until June 2015, so whilst your employer may withhold Income Tax for the month of July, presuming you have little or no other income, it is unlikely you would pay very much Income Tax at all when you submit your 2014-15 Tax Return. Remember Income Tax is not payable on the first $18,200 of taxable income.
Tax on Superannuation Salary Sacrifice contributions is 15% so it could end up being more than what you would have paid as income tax if you chose to Salary Sacrifice your July income. Please note, if you were to Salary Sacrifice your July income, you would have needed to elect to do so prior to the commencement of the new Financial Year as you cannot Salary Sacrifice retrospectively.