If you’ve been living under a rock for the last 6 months, you may have missed the fact that the sinking iron ore price is putting the State Government under immense pressure to reduce costs. In order to do so, Colin Barnett recently announced that 1,500 public sector job would be cut, with the potential for more to come. These cuts seem to be across the board, and while Health (500 jobs), DAFWA and Western Power have been targeted so far, redundancies for further public sector departments are expected soon.

So what’s the good news?

Well, if you’ve been thinking about retiring, the opportunity for a voluntary severance could provide the incentive (if needed) and the financial capacity to do so. Certainly, if you were planning on retiring within the next 3 years anyway, it may be worth investigating the offer further. At best, a voluntary severance can be the financial icing on the cake of a long career in public service.

How does voluntary severance (VS) work?

Effectively, to be offered a voluntary severance, you will need to satisfy certain criteria:

  • You currently hold a position that is abolished or soon to be abolished
  • You hold a position identified as surplus
  • Suitable employment cannot be found for you

There will be an initial assessment by the CEO, including a business case prior to any VS offers. After this, the Public Sector Commission will consider the application – note that VS offers are not automatically approved. Once both of these hurdles are met, an offer will be made. You will have time to consider the offer prior to accepting, which means that if you are in two minds, it may be best to simply apply and see what the final amount will be prior to making your decision. The final stage is reporting, where the Public Sector Commission receives all details. Each agency/department is also required to notify Centrelink of employees who accept voluntary severance.

What will I be offered?

The current round of redundancies will be slightly less generous than those previously offered. The State will be offering 3 weeks of pay for every completed year of service to a maximum of 52 weeks, plus an additional (up to) 12 weeks in lieu of notice. This is in addition to any accrued leave (such as annual or long service leave). Redundancies in the past were paid at up to 20 weeks in lieu of notice.

Let’s look at Jane (63) as a case study. Jane commenced work with the Health Department on 1 September 2000 and earns a gross income of $80,000pa. As the current round of offers will be completed after 1 January 2015, but before 30 June 2015, she will have completed 14 years of service. The additional 9 months or so will not be included in the calculation.

Disregarding any leave she has, she will be entitled to 42 weeks of pay (Ie: around $64,000). She may also be entitled to a further $18,000 (approx.) in lieu of notice, not counting any annual leave or Long Service Leave entitlements.

 How will the payment be taxed?

This can be a little tricky, and will vary from person to person. Generally, your department will confirm the amount of the redundancy, as well as the tax payable prior to you accepting the offer. The payment will be considered an Employer Termination Payment (ETP) by the ATO and taxed as follows:

Reason for Payment Genuine Redundancy Account
Genuine Redundancy Before Preservation Age* Tax Free up to $9,514 plus $4,758 for every completed year of service. Excess up to cap of $185K @ 30% plus the Medicare levy.
Genuine Redundancy After Preservation Age* and Before 65 Tax Free up to $9,514 plus $4,758 for every completed year of service. Excess up to cap of $185K @ 15% plus the Medicare levy.
Genuine Redundancy After Age 65 15% tax up to $185K cap amount plus the Medicare levy (2%).

Amounts above $185,000 will be taxed at the top marginal tax rate, plus Medicare and the debt reduction levy (ie: 49%).

As you can see, how much tax you pay depends on whether you are under preservation age, between preservation age and 65, or over 65. In fact, if you are turning 65 in the next 6 months, the timing of when the redundancy will be paid may be  important in terms of how much tax you pay.

In Jane’s case, her entire redundancy payment (not including leave) will be tax free. Her tax free portion is $76,126 using the formula above. Amounts above this would be taxed at between 32% (if under preservation age, or 17% between preservation age and 65. If she was over 65, the entire portion would be taxed at 17%.

What about my leave entitlements?

Taxing of leave via redundancy is an interesting one, and is sometimes quite complicated.

The table below summarises a fairly complicated calculation. Very broadly, for most people, most (if not all) of their leave will have tax deducted at normal marginal rates.

Payment type Accrual dates Tax payable*^
Long service leave Pre-16 August 1978 5% of total at marginal rates
16 August 1978 to 17 August 1993 32%
Post-17 August 1993 32%
Annual leave Total 32%

*Note that this simply refers to the rate paid via a genuine redundancy. Higher rates apply on normal retirement.

^If your normal tax rate is less than 32% (for example, because you have been salary sacrificing heavily), you will receive a refund when you complete your tax return.

Can I afford to retire?

For many, the question of whether a redundancy should be taken boils down to whether or not they can afford to retire – and by this, I mean afford to be able to do the things that are important to them. Contrary to what the superannuation industry (complete with DIY calculators, enormous ‘minimum amounts to retire’ and a general vibe that seems to do nothing but add to the confusion) tells you, there is no ‘standard minimum’ amount!

At the end of the day, the amount that someone needs to be comfortable is highly dependent upon what it is that they want to achieve. As advisers, one of the most important parts of our job is to illustrate (within a reasonable bound of likelihood) what can and cannot be achieved in a certain set of circumstances. Some people can retire comfortably on $150,000, while others need over $1m in order to achieve their personal retirement goals.

It all boils down to what you want. Too many people think in terms of which investment is right, or whether they should have money inside superannuation or outside superannuation. They spend hours thinking about this, and no time answering the real question, which is, what is important to me financially? Once this is answered, you can then turn to the question of whether or not you can afford to retire. The answer to this question, I’m sorry to say, has no magic number.

What should I do with the money?

In our next blog, we will outline some options to think about with the redundancy proceeds, including how people who joined the public sector prior to 1983 can slash their tax bill, how putting money into super works, and what happens with your West State and Gold State superannuation accounts.

Stay tuned!