30 – Redundancy payments

Et tu, Brutis

I say down with some long time Dover advisers recently. Trinity Advisers. There are three of them. Dominic, the founder, and Judis and Brutis, his not so loyal colleagues and co-owners.

The meeting mood was melancholic. The changes were coming too thick and too fast. FOFA, LIF, commission cuts, new education standards, changing super laws and an incredibly volatile equities market meant Dominic, the founder, was not coping at all. 

This article caused Dominic significant stress: Call to extend transition to planner degrees (Brutis had cruelly e-mailed it to Dominic). Dominic was sixty four, had started the company thirty years earlier, and did not want to go.

But as far as Judis and Brutis were concerned Dominic was surplus to requirements. Redundant. It was all over red rover. Nothing more to talk about.

Now it was all about the money. I explained the tax law has concessional rules for genuine redundancy payments. It’s a deliberate government subsidy to genuinely redundant employees. It applies to genuinely redundant employee financial planners too.

The trio agreed Dominic would be paid $180,000 on 1 July this year, just before his 65th birthday. This was the amount paid to a similarly redundant arm length employee a year or so earlier: a demonstrably arm’s length amount.

In summary, the tax free amount is $9,780 plus $4,891 for each completed year of service. This means the first $156,510 is tax free in Dominic’s hands.

The balance of the redundancy payment, ie $23,490, is taxed at just 17%.

These generous tax rules helped resolve what could have become a bitter and costly dispute between the owners. Faced with a tax saving of about $50,000 cash Dominic decided Judis and Brutis were right and it was time to go after all.

In case you are wondering about what happened to Dominic’s interest in the practice itself, Dominic’s family trust was paid one third of the market value of Trinity Adviser’s financial planning business. This was CGT free, since it was acquired before 20 September 1985.

Income Tax Ruling TR 2009/2 deals with genuine redundancy payments and sets out the ATOs’ views on how the redundancy payment rules work and includes comments on non-arm’s length employees such as Dominic. It can be read here: Taxation Ruling TR 2009/2.

The Dover Group