Changing or leaving jobs

At some stage during our working lives we will change, or leave, a job. This can be for a number of reasons including finding a better opportunity, to take a break, redundancy or ultimately retirement. Generally when an individual leaves a job, regardless of the reason, they may receive various payments. These payments can range from unused annual leave payments to lump sum amounts such as ‘golden handshakes’ or ‘payments in lieu of notice’.

Depending on the type of payment, it may be classified as an ‘Employment Termination Payment’ (commonly referred to as an ETP) which means it will be subject to pre-determined tax rates. Payments which are not classified as ETPs are subject to tax at rates specific to the payment.

In the 2012 Federal Budget, the Federal Government announced changes to the way ETPs are taxed from 1 July 2012. These changes can impact significantly on the amount of tax deducted from an ETP and therefore reduce the net payment received by the individual. These changes mean that where possible, it is more important than ever to get advice prior to actually changing or leaving a job, to help optimise the payment received.

What payments are classified as ETPs

As noted above, not all payments an individual receives, when leaving or changing jobs, are classified as ETPs. This is important, as only ETPs are impacted by the recent rule changes. ETPs generally comprise of the following:

• Payments in lieu of notice,
• A gratuity or golden handshake, and
• A payment received as a result of redundancy that is above a certain threshold.

Previously, the taxation of such payments ignored any other income the individual may have received. However from 1 July 2012 this is no longer the case. While the rule changes have broadly impacted all ETPs, there is an exception to payments that are linked solely to redundancy. However generally when an individual is made redundant, they will receive a combination of payments some of which are impacted by the rule changes and some which are not. The situation can be complex and seeking advice early is vital.

What payments are not ETPs

In addition to ETPs, other payments may be received. The most common are for:

• Unused annual leave,
• Unused long service leave, and
• A payment received as a result of redundancy that is below a certain threshold.

These payments are not impacted by the rule changes.

So what does this all mean?

In summary, the recent rule changes can leave an individual with three types of payments, with different tax implications and strategic opportunities:

• ETPs that are impacted by the rule changes,
• ETPs that are not impacted by the rule changes, and
• Other payments which are not impacted by the rule changes.

Changes in legislation often makes matters complex. It is best to seek advice, to ensure that you make informed financial decisions.

Case Study – timing the move

One important issue to consider when leaving a job is timing. On occasions, delaying the date an individual leaves their job can increase the value of the net payments that are received. Timing can be of particular relevance where an individual may be changing or leaving their job later in a financial year.

In order to demonstrate, let’s consider a case study. Susan is 47 years old and has been considering changing her employment. She wishes to change direction in her career and at this point needs to determine what that direction is to be. As a result, upon leaving her employer she wishes to take a break to consider her options.

She is currently on an income of $150,000 per annum. If she were to change her job it is likely her income would initially reduce. Consequently, after taking this into account and the fact that she will be taking a break, she estimates her income for the following financial year will reduce to $100,000.

Referring to her employment agreement, she is entitled to an ex-gratia payment of $40,000 together with $10,000 as a payment in lieu of notice; therefore in total she receives an ETP of $50,000. This is in addition to the any unused annual leave she may be entitled to.

Option 1 – Leave at the end of 2012/13

Firstly, let’s assume that she leaves her current employer on 30 June 2013. Without going into too much detail:

• Half of her ETP ($25,000) will be taxed at 31.5%, while
• The other half ($25,000) will be taxed at 46.5%.

Therefore, in total, Susan's ETP will be subject to tax of $19,500 leaving her with a net payment of $30,500.

Option 2 – Leave at the beginning of 2013/14

If Susan had delayed leaving her employer by a week or two, her tax bill on the ETP would be around $15,750 based on the assumptions above – a reduction of $3,750.

It can be seen from the above case study that delaying the date that an individual leaves their job can make a difference and where possible this option should be considered prior to making the decision of when to leave an employer.

One point to note is that the above case study has been simplified to highlight what the potential benefit may be. Often the situation faced by an individual will be more complex and the outcome may not be obvious. Obtaining advice will ensure that an informed decision can be made.

In closing...

The issues that need to be considered when an individual changes or leaves their job, have become more complex over time. The recent changes announced in the 2012 Federal Budget have only increased this complexity. While on occasions, there may not be much flexibility around the date an individual will cease working with a particularly employer, if the decision to leave is personal then there is often an opportunity to seek advice before making the decision.

Note that advice should still be sought if the decision to leave has already been made, however seeking advice earlier may allow further options which may not be otherwise present.