Tax benefits of redundancy payments
Genuine redundancy payments provide significant tax benefits for recipients. The redundancy payment will be tax-free up to a limit and based on years of service. For 2024-25, the tax-free component is $12,524, plus $6,264 for each completed year of service.
Payments above the tax-free limit will be concessionally taxed as an employment termination payment (ETP), capped at $245,000. An ETP is taxed at the concessional rate of:
- 17% if you have reached your preservation age (age 60 years and older but under the age pension age of 67)
- 32% if you have not reached preservation age
- Anything above $245,000 is taxed at the top marginal rate of 45% plus the Medicare levy.
Redundancy payments are in addition to wages still owing, such as salary paid in lieu of notice and statutory entitlements such as accrued annual and long service leave.
Some employers may give people the option of accepting the redundancy payment in the current financial year or delaying it until the next financial year when taxable income may be lower.
New ATO guidelines on personal services income
Thousands of small businesses could be hit with higher tax following the recent ATO guideline on personal services income (PSI). This follows the release on 28 August 2024 by the ATO of draft practical compliance guideline PCG 2024/D2.
The draft PCG explains the type of alienation arrangements the ATO considers to be of low or higher risk in terms of Part IVA applying and the likelihood of the ATO having cause to apply compliance resources to review those arrangements.
Income is classified as PSI when more than 50% of the income received from a contract is a reward for personal efforts or skills of the individual.
The law applies to a wide range of professions and occupations including doctors, dentists, plumbers, electricians, carpenters, bricklayers, accountants, lawyers, beauticians, hairdressers, and many others.
Example
Steve starts a plumbing business though a company and makes his wife and himself equal shareholders in the company. The company derives income of $250,000 during the year “mainly from Steve’s personal efforts”. Steve pays himself a salary of $120,000 plus superannuation.
The company makes an after-tax profit after Steve’s super and other expenses, of $80,000. The company then pays a dividend of $10,000 each to Steve and his wife, meaning there is $60,000 of retained profits.
Whilst there may not appear to be anything wrong with this scenario from a tax perspective, there is according to the ATO – that’s because Steve has now split his personal services income (PSI) with his wife (in the form of dividends) and retained some of the profits of the business in the company. In other words, the overall rate of tax payable on the company’s income is lower than if the whole amount had been taxed to Steve personally.
This example is illustrative of the shock that is coming to thousands of small and micro businesses in Australia.
The ATO makes it clear that the only situation it will consider ‘low risk’ is where all the net profit of a PSI business is assessed to the individual that earned the PSI and there is no deferral of taxation. This will be a shock to thousands of ordinary family businesses and their tax advisers as many operate under a similar structure.
Disclosure of business tax debts to credit reporting bureaus
The ATO advises that it expects to increase the number of intent-to-disclose notices this income year. Between 1 July 2023 and 31 March 2024, there were 31,000 instances where the ATO disclosed business tax debts to credit reporting bureaus.
The ATO may disclose tax debts to a credit reporting bureau where a business:
- has an ABN and is not an excluded entity;
- owes at least $100,000, which is overdue by more than 90 days;
- has not engaged with the ATO or taken other action to manage its debt; and
- does not have an active complaint with the Inspector General of Taxation about the ATO’s intent to report their tax debt information.
Businesses who meet each of those criteria will be sent an inent to disclose notice from the ATO which is the final notification before the ATO progresses to disclosing those debt. They are given 28 days to act upon which it is highly likely that those debts will be disclosed without any further notice to the taxpayer.
Where the business no longer meets the criteria once the ATO has disclosed the debts, the ATO is obliged to ensure that those debts are removed from the credit reporting bureau reports.
Lifestyle assets data-matching program dated 26 August 2024
The ATO has announced that it will acquire lifestyle assets data from insurance providers for 2023-24 through to 2025-26. Insurance policy data will be collected for the following classes of assets, where the asset value is equal to or exceeds the nominated thresholds.
- Caravans and motorhomes with a minimum asset level of A$65,000
- Motor vehicles – cars/trucks/motorcycles with a minimum asset level of A$65,000
- Thoroughbred horses with a minimum asset level of A$65,000
- Fine art with a minimum asset level of $100,000
- Marine vessels with a minimum asset level of $100,000
- Aircraft with a minimum asset level of $150,000
It's not clear if the above threshold amounts are inclusive or exclusive of GST.
The data when collected by the ATO will assist with the collection of unpaid income tax, capital gains tax, fringe benefits tax and GST.
In relation to self-managed superannuation fund (SMSF), the above data will assist the ATO when auditing a SMSF for potential breaches of superannuation laws (e.g. sole purpose test).
The ATO indicate that some 650,000 to 800,000 insurance policy records will be obtained for each financial year and expect some 250,000 to 300,000 matched records will relate to individuals.
$17.8 billion in lost super
The ATO has advised that more $17.8 billion in lost and unclaimed super is waiting to be claimed for over 7.1 million accounts.
Lost super is when your fund has lost touch with you, or your account is inactive. It becomes "unclaimed super” when your fund transfers this lost money to the ATO.
The ATO says that some people lose track of their super if they changed their name, moved homes or changed jobs and forgot to update their contact details with the super fund.
Click here for details on how to search for lost super amounts.
