From 1 July 2019, the eligibility age limit for the tax-free concession on these payments will be raised to be in line with the Age Pension qualifying age.
Up until now, this tax-free component has only been available to those aged below 65 at the time employment is terminated.
As a result of the changes, all individuals younger than 66 will be able to receive the tax-free component on the payment received from their employer in the event of genuine redundancy or early retirement as of next year.
This threshold will increase again to age 67 by the year 2023.
In a statement released on Saturday, Treasurer Josh Frydenberg said the reforms will “not only ensure older Australians keep more of the money they’ve earned, it will also support workforce participation by removing a barrier that may have prevented some from working longer.”
What does this mean for you?
Liam Shorte, director of Verante financial planning, told Nest Egg he welcomes the reform.
He says he has seen clients exit the workforce earlier than desired in order to avoid paying tax on their redundancy payments.
“Until now, some clients who did not necessarily wish to take a voluntary redundancy at 62-65 when offered, had done so as they did not want to lose out on the tax-free component of any redundancy payout by waiting for another offer in later years,” Mr Shorte said.
“It may not seem like much, but to be able to still avail of the benefit up to age 66 and later 67 will mean one to three more years of additional savings for some clients.”
Mr Shorte says the change is important in promoting older individuals to stay in the workforce longer and grow their nest egg.
“These years leading up to 65, 66 or 67 are the years when people can seriously save large amounts both through salary sacrifice and non-concessional contributions to help fund their own retirement,” he said.
“Many will only realise how good this move is when they are offered a redundancy and see the tax outcome in the coming years.”