Redundancy Tax Credits

People who are paid redundancy compensation are now entitled to claim a tax credit of six cents in the dollar, up to a maximum of $3,600.

The tax credit is designed to rectify the situation where income earners are pushed to a higher tax bracket by reason of their redundancy payments.  However, the tax credit is currently made available to every tax payer who receives such a payment.

The tax credit will apply to redundancy payments paid on or after 1 December 2006.

Who can apply?

The tax credit is generally allowed on a redundancy payment that is:

• paid to an employee whose employment is terminated because their position is surplus to the requirements of their employer; and
• paid as compensation for the employee's loss of employment.

Who cannot apply?

Some payments do not qualify for the redundancy tax credit.

These include payments for:

• retirement from employment;
• loss of seasonal employment arising from a normal seasonal work cycle;
• a contract of employment for a fixed term;
• employment for a period following notice of termination of employment;
• a redundancy payment paid, directly or indirectly, by an employer who is "associated" (e.g a director or employee–shareholder) or related to the employee.

Claiming the Tax Credit

To claim the tax credit, people need to complete the claim form (IR524) and provide documentation that clearly shows the amount of the redundancy payment received.  (See www.ird.govt.nz/yoursituation-ind/retirement/redundancy-tax-credit/).

As claimants will need to provide documentation to support their claim for a tax credit, it will be important for employers and their employees to clearly understand the reason why the employment terminated (i.e was it for redundancy, or some other reason including resignation, mutual agreement to terminate or dismissal?).  The tax credit may also be a relevant factor to consider when seeking to structure a tax-effective settlement agreement.

How the redundancy tax credit is calculated and paid

The calculation

The redundancy tax credit will be paid at a flat rate of six cents per dollar, for the first $60,000 of the redundancy payment received per redundancy.

The maximum amount claimable per redundancy is $3,600.

For more information, please contact:

Erin Davies
Partner
t: +64 9 979 2177
m: +94 29 622 2300
e: Erin Davies

Last updated: 1 June 2008