Reaching the pension age on redundancy

When processing a redundancy, one of the first things payroll needs to establish is whether the employee qualifies for the tax concessions of a genuine redundancy – and age is a determining factor.

If an employee has reached pension age at the time of their dismissal, the redundancy is not considered a genuine redundancy under Australian tax law. Instead, it is treated as a non-genuine redundancy, which affects how the payment is taxed.

How pension age affects the redundancy calculation

A non-genuine redundancy occurs when the employee is at pension age or older on the day of dismissal. In practical terms, this means:

• If the employee is below pension age at the date of termination – they are eligible for the tax concessions of a genuine redundancy, and the tax-free component is reported as Lump Sum D.
• If the employee is at or above pension age at the date of termination – they are not eligible for those concessions. Amounts that would have qualified as Lump Sum D are instead reported as an excluded ETP (code R).

The steps for payroll are straightforward:

1. Identify the employee’s date of birth
2. Refer to the pension age table below to determine their pension age
3. Confirm whether they have reached that age on the date of termination
4. Apply the appropriate tax treatment based on the outcome

Pension age table — Social Security Act 1991

Example

Barbara was born on 15 March 1955 and is 71 at the time of redundancy. Referring to the table, her pension age was 66 years and 6 months. Barbara is well over pension age at the date of dismissal – she is not eligible for the concessions of a genuine redundancy.

Any amount that would have been Lump Sum D now becomes an excluded ETP (code R). Barbara also has an annual leave and long service leave balance to be paid out. Because her leave was accrued from a period that falls within her current employment, it is taxed at marginal rates in the same manner as a resignation.

Tips for payroll

The pension age table is not the same as the preservation age table – these serve different purposes:

• The pension age table is used to determine whether an employee is eligible for the tax concessions of a genuine redundancy
• The preservation age table is used to determine the applicable tax rate on an ETP

Make sure you are referring to the correct table before processing.

Wasn’t the age limit previously 65?

Yes. Prior to October 2019, the age-based limit for accessing concessional tax treatment on genuine redundancy payments was a fixed 65 years. That changed on 29 October 2019 when the Treasury Laws Amendment (2019 Measures No. 2) Bill received royal assent, replacing the fixed age of 65 with each individual’s pension age. The change applied to payments made on or after 1 July 2019.

This means some employees who were previously ineligible because they were 65 but had not yet reached their pension age,  now qualify for the genuine redundancy concessions.

Thinking about outsourcing your payroll?

Redundancy calculations including age eligibility, ETP classification, and leave tax treatment are among the more complex areas of Australian payroll.

At Alltech, we manage payroll for 150+ businesses across Australia, including end-to-end processing of termination and redundancy payments. Get in touch to find out how outsourced payroll works and whether it’s right for your business.