Genuine Redundancies Can Result In Tax Free Payments To Employees Including Family Members

Updated July 5th 2023

From time to time a business may be required to make an employee redundant because the job they were doing is being abolished. Typically in these situations the employee receives a redundancy payout.

Certain payouts, known as genuine redundancy payments may include a tax free component for the employee. For the 2013-2014 financial year the tax free component for the employee is $9,246, plus $4,624 for each completed year of service. A business is able to claim a tax deduction for the redundancy payment made.

Under certain circumstances these genuine redundancy payments can be also made to family members who are working as employees within a family business as the example below illustrates.

John runs a hotel business through his company of which he is the sole director. John’s wife Mary has been working as an employee in the business for almost 12 years.

For commercial reasons John has decided to make Mary’s position redundant and he will need to pay Mary a market value redundancy payment. Of the payment received by Mary she will be eligible to receive up to $60,110 tax free. The company will also receive a reduction in tax equal to 30% of the redundancy payment made. Mary is 62 years of age and after hearing about the news of her redundancy she has decided to stop working altogether rather than look for work elsewhere.

If you think this situation could apply to you, please contact Graeme Bellach at CIB Accountants & Advisers to discuss in more detail.