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Payroll – Lifting the age limit for genuine redundancy and early retirement scheme payments

Employers contemplating redundancies or early retirement schemes should be aware of the Government’s action to lift the age limit for genuine redundancy and early retirement scheme payments with effect from 1 July 2019. This will give employers marginally greater scope to package payments which are tax-free for redundant/retiring employees and potentially marginally greater flexibility in re-structuring their workforces.

Parts of ‘genuine redundancy payments’ and ‘early retirement scheme payments’ paid to outgoing employees are tax-free to the employees (s. 83-170 ITAA 1997).

Proposed change to one of the conditions for the payments

Currently, one of the conditions for a payment to be a ‘genuine redundancy payment’ (s. 83-175 ITAA 1997) is that recipient is dismissed before the earlier of:

  1. ‘the day he or she turned 65’; or
  2. ‘if the employee’s employment would have terminated when he or she reached a particular age or completed a particular period of service – the day he or she would reach the age or complete the period of service (as the case may be)’.

The Treasury Laws Amendment (2019 Measures No. 2) Bill 2019 (the Bill) substitutes the ‘pension age’ for the age of 65 specified in item (i), with application to employees who are dismissed on or after 1 July 2019.

The Explanatory Memorandum for the Bill summarises the pension ages (s. 23(5A) and (5D) Social Security Act 1991 ) for men and women born on or after 1 July 1952 in the following table:

Date of Birth Age pension qualifying age
1 July 1952 to 31 December 1953 65 years and 6 months
1 January 1954 to 30 June 1955 66 years
1 July 1955 to 31 December 1956 66 years and 6 months
On or after 1 January 1957 67 years

The pension age for all men born on or before 30 June 1952 is 65 and this is also the pension age for women born from 1 January 1949 to 30 June 1952.

At present, early retirement scheme payments (s. 83-180) are subject to a corresponding condition that the recipient retire from employment before the earlier of:

  1. ‘the day he or she turned 65’; or
  2. ‘if the employee’s employment would have terminated when he or she reached a particular age or completed a particular period of service – the day he or she would reach the age or complete the period of service (as the case may be)’.

In the context of early retirement scheme payments, the Bill also substitutes the ‘pension age’ for the age of 65 specified in item (i) with application to employees who retire on or after 1 July 2019.

The legislative change was announced in the 2018-19 Mid-Year Economic and Fiscal Outlook. In that statement, the Treasurer observed:

‘The Government will align the age below which individuals can receive genuine redundancy and early retirement scheme payments (genuine redundancy payments) with the Age Pension qualifying age. This means that all individuals below the Age Pension qualifying age will have access to the tax concession that makes part of any genuine redundancy payment free of income tax (the tax-free component). This measure takes effect from 1 July 2019 …’

The Bill is giving effect to this change.

Action Point:

In anticipation of the enactment of the change, employers may like to consider the greater flexibility to retain older experienced staff in the short term as part of a more gradual re-structuring, without the pressure of forgoing a valuable cost saving inducement for employee co-operation. However, while trite, it is worth highlighting that in the case of reliance on redundancy, the gradual nature of the re-structure needs to be consistent with a redundancy arising.

It should also be emphasised that the existence of a genuine redundancy payment or an early retirement scheme payment depends on requirements in addition to the age condition discussed in this note.

Progress of the Bill can be monitored through the Parliament House website.