In an everchanging workplace, role redundancy can happen for many reasons among the more common is a company restructure, introduction of new technology that replaces human effort, the business closes down or relocates interstate or overseas.
Recruitment website SEEK, indicates around 26% of Australians have had their role made redundant in their working life, and more than half the population has either experienced redundancy themselves or they know someone else who has. Redundancy is common. While we don’t suggest anyone should live in fear of redundancy, it doesn’t hurt to be prepared just in case.
For executives whose role no longer exists or will be made redundant in future, here are three matters that need consideration.
1: Your Executive Share Scheme (ESS)
Managing your ESS can be complicated at the best of times, let alone under redundancy circumstances.
Generally speaking, employees who leave because of redundancy including voluntary redundancy, are considered ‘good leavers’ and any unvested awards are reduced by the pro-rata number of days the employee has not served with the company during the period from grant to vest. Put simply, if you served half the vesting time, you’d more than likely receive half your award at vesting.
However, as I said – it’s complicated. The impacts of any foreign service you may have served will also have pro-rata considerations and in accordance with that country’s tax laws.
For those with a performance award, performance tests and tax implications on future performance periods, in addition to time-based vesting periods, will also be applied.
Then you’ll need to manage your tax return.
As each tranche of performance tested awards vest, assessable income is generated, and the date your employment ceases will be considered the date some of your awards become taxable. For performance shares, different tax rules may apply where the assessable income from these awards is determined at the point these awards have their performance vesting criteria met. If you have older performance share awards, these may be subject to different tax legislation which has a different applicable date and may require amendments to prior year’s tax returns.
May I suggest you’ll need advice to manage the tax efficiently to make the most of your ESS investment return. You may wish to read more here from an earlier article I prepared for Mining & Resources executives.
2: Manage your surplus cash
Many high earning executives have surplus cash and proactively managing it is good practice especially for to provide a financial safety net when events such as redundancy occur.
Rather than allow your surplus cash to languish in a bank account, many executives choose to pay down their home loan or boost their super contributions to the maximum annual cap allowance. While there are benefits to both these approaches, in a redundancy situation when income may stop for a period of time you’ll need ready access to your cash.
If you contribute to super, your money will more than likely be locked in until retirement age and withdrawing any additional home loan repayments may incur additional loan fees and interest depending on the lender’s conditions.
However, surplus cash held in a home loan offset account may provide a two-fold solution in a redundancy situation. Firstly, the money held in the offset account is linked to the loan account it reduces the loan balance, therefore reducing the amount of interest payable on the loan, and secondly, even though it’s linked it’s a separate account providing access to your cash when you need it. You can read more about the benefits of an offset loan account here.
Personal Risk Insurances
Rather than cancelling your personal risk insurance premium, especially in a redundancy situation where you are likely to resume work in future, you should consider whether a ‘premium holiday’ may be available instead.
Insurance premium holidays have been around for a long time, but came back into prominence during Covid when many people temporarily stopped work and they needed to reduce their expenses. Not all insurance policies have this feature, but it’s worth checking to see whether this could be of benefit to you.
Similarly for redundancy circumstances, cancelling your personal insurance could prove costly in the long term for you and your dependents, should you suffer an accident, illness or you pass way. It’s also important to understand that once cancelled, if you wish to reinstate it’s not a case of picking up where you left off.
The process starts from scratch, meaning any long-standing insurance benefits may no longer apply. Your new application will take into account your age and changes in your health and personal circumstances which will likely mean your new policies will be more expensive and potentially offer less cover. In the worst-case scenario, no cover at all if the insurer considerers you too great a risk.
Insurers offering premium holidays will have different premium suspension conditions and usually no claims are allowed while the policy is suspended.
Next steps
While no one wants to experience redundancy, being financially prepared for what-if situations, including redundancy, can be the difference between providing yourself with the time necessary to make decisions that are right for you. It’s worth noting, the Seek article indicated 60% of Australians affected by redundancy found another job within two months.
If you are affected by redundancy or you are thinking about taking voluntary redundancy, especially if you have an ESS, please contact James Marshall on +61 (0) 7 3007 2080 or email contact@executivestrategies.com.au
To learn more about James, visit this link.
Executive Strategies is a specialised information hub for executives and senior managers who may have founded their own business or who work for growing private, ASX listed companies or government businesses. Its purpose is to provide access to specialist advisers and information that addresses the often-complex issues affecting their personal prosperity.
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth ABN 54 139 889 535 AFSL 357306. This advice is general and does not take into account your objectives, financial situation or needs. You should not act on it without first obtaining professional financial advice specific to your circumstances.
*Please note: For advice and services relating to this matter that are not offered under the Fortnum Private Wealth AFSL, in accordance with our collaborative advice model, when required, such matters are referred to appropriately qualified professionals.
