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Govt introduces fairer taxation of redundancy pay

11 December 2007
Media Statement
Govt introduces fairer taxation of redundancy pay

The government today introduced legislation to make the taxation of redundancy payments fairer to people who are pushed into a higher tax bracket when they receive the lump sum payments.

“Under current tax law, lower and middle-income people can be over-taxed when their redundancy pay pushes them into a higher tax bracket,” Finance Minister Michael Cullen and Revenue Minister Peter Dunne said today.

“Redundancy payments are employment income, and it is fair that they are taxed. However, taxing these payments at a higher rate of tax without taking into consideration the recipient’s personal tax rates before and after redundancy has led to many cases of over-taxation. When that happens it can come at what is already a very difficult time for most people.

“To resolve the problem, and to keep complexity and compliance costs to a minimum, the government is introducing a simple tax rebate that will apply to redundancy payments made on or after 1 December 2006.

“Calculation of the rebate will be based on the flat rate of six cents per dollar, up to $60,000 per redundancy. That means, for example, that someone who receives a redundancy payment of $20,000 will be able to claim a $1,200 rebate. Someone who receives a $60,000 payout can claim a rebate of $3,600.

“Because the maximum redundancy payout that qualifies for a rebate is $60,000, the rebate itself is capped at $3,600, so someone who receives a payout larger than $60,000 will be eligible for a $3,600 rebate.

“The process for obtaining a rebate will be straightforward. Once the system is in place, from 1 April next year, recipients will be able to claim a rebate immediately after receiving their redundancy payout by completing an Inland Revenue form. Over time an automated system will be developed to reduce compliance costs further.

“The government is pleased to have found a solution to a complex tax problem that has been of concern to workers and unions for some time. The changes announced today will make help to make the taxation of redundancy pay fairer to all concerned,” the Ministers said.

The changes are being added to the taxation bill currently before Parliament by means of supplementary order paper No. 167, which was released today.

Examples of different redundancy payment rebates

The redundancy payment rebate is a flat 6 cents in the dollar for every dollar of redundancy payment, up to a cap of $60,000 of payments received in relation to each redundancy.

Examples

1. Jill receives a redundancy payment of $20,000. Her redundancy payment rebate claim will be $1,200 ($0.06 x $20,000).

2. Simon receives a redundancy payment of $80,000. His redundancy payment rebate is capped at the maximum of $60,000, giving a rebate of $3,600 ($0.06 x $60,000).

3. Sue is made redundant and receives her redundancy compensation of $100,000 in two instalments – the first payment is $30,000 and the second payment is $70,000. She can claim only the maximum rebate of $3,600 because total redundancy payments in relation to the one redundancy are capped at $60,000. Note that it is the total amount of redundancy payments in relation to each redundancy that is relevant. Note also that Sue could claim the rebate for the first payment of $30,000 – a rebate of $1,800 ($0.06 x $30,000) and then make a second claim for the remainder, up to the cap amount – another claim for $1,800 ($0.06 x $30,000).

4. Josh is made redundant twice in a 12-month period by separate employers. For the first redundancy, he receives $70,000. For the second redundancy he receives $5,000. He can claim the maximum $3,600 in relation to the first redundancy (the $60,000 cap applies). He can also claim for the second redundancy – $300 ($0.06 x $5,000). It is the individual redundancy that is relevant.


ENDS

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