For mining and resources executives whose roles have been made redundant in the recent rash of company restructures, the exit payout they receive can be significant. Just how lucrative the redundancy windfall could be will likely depend on tax smart financial decision making.
In recent months there has been an increase in redundancies, and perhaps the highest profile being Glencore’s copper mine closure at Mt Isa. Set to take effect in 2025, it will bring an end to some 60 years of continuous operation.
But it’s not the only company going down this path, and many affected executives are currently in the process of working through the complexities of wrapping up their substantial remuneration packages. A key issue will be the tax implications and not just on their exit payment.
The nature of mining and resources industries is that roles often become redundant as projects complete, mines reach their end of life and strategic priorities or economic factors cause changes in direction requiring business restructuring.
For some long serving and highly paid executives I’ve been working with in recent months, their redundancy payout will represent a vast amount of after-tax dollars – in the hundreds of thousands!
These once-of redundancy payments often equate to what would have otherwise been many years of savings, particularly in situations where executives have been working for a long period of time for the same company.
Such a significant windfall can create financial and lifestyle opportunities that can life changing.
While many mining and resources executives may choose to retire early, for others there is very high likelihood of rapid re-employment due to demand elsewhere in the industry.
On that matter, if you are in a position where you have received an offer of employment with a different company, may I suggest you take the time to fully understand your new remuneration package.
Comparing the benefits and value of your new offer against those you’ve enjoyed previously may also prove worthwhile. I’ve written about remuneration comparison previously, and I invite you to read it here.
Generally speaking, mining and resources executives already have significantly more complex financial lives than most other executives and redundancy can take that complexity to a whole new level.
Qualified financial and specialist tax advice, at the time of redundancy, especially when such vast sums of money are involved, can help executives get their financial life in order and maintain it thereafter.
Among the financial matters to be discussed are options relating to what may be significant surplus cash resulting from the redundancy payment, and ESS outcomes including shares that may vest on a pro-rata basis due to your position becoming redundant.
Then there are other matters including how to manage proceeds from other investments, your personal cashflow requirements, debt strategy, personal risk including wills and estate planning.
Any financial missteps could result in paying more tax than necessary or getting stung by tax penalties for tax commitments you didn’t know you had.
In my experience advising mining and resources professionals for nearly a decade, qualified advice and insight is imperative, especially in during the reasonably rare redundancy opportunity. Advice will help executives to use their redundancy payout and circumstances to achieve an approach that’s right for them which may include increasing their savings and reducing debt, growing their superannuation and retirement savings and investing to establish future income streams that will sustain their lifestyle, once they do decide to stop work.
Redundancy and Executive Share Schemes
Executive share schemes (ESS) always requires special mention, especially in redundancy circumstances as there are complex and strict ATO compliance requirements that must be addressed.
Failing to meet ATO requirements usually results in unexpected tax bills at considerable disruption to personal cashflow or causing an unwanted share sale to meet the obligation.
In most circumstances, executives whose roles are made redundant (including voluntary redundancy) are deemed ‘good leavers’ by the company under its executive share scheme conditions.
As good leavers, rather than lose all unvested shares as is generally the case for resignation, 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. To put it plainly, if you worked half the vesting time you will likely receive half your award at vesting.
However, it’s almost never that simple. For example, if your scheme included grants awarded, during a period of foreign service, there may be foreign tax laws would come into play.
There are also important tax considerations for performance awards, performance tests and future performance periods not forgetting time-based vesting periods.
As each tranche of performance tested awards vest, assessable income is generated.
Prior to 1 July 2022, cessation of employment was usually the point at which performance shares would be taxed in the event of a position being redundant. This often created a cashflow issue, as tax was payable at that point, even though a vesting of the performance share awards had not occurred. From 1 July 2022, this legislation was changed so the taxation point of a performance award becomes the time at which that award vests, rather than when your position may be made redundant.
The usual ESS tax rules apply on any awards which have already vested, where each parcel of shares you own will have a specific cost base related to them.
As I mentioned at the outset, making the most of a redundancy windfall usually involves being apprised of tax laws, the different financial planning options available and in turn, making tax-effective financial decisions that are right for you.
If you are affected by redundancy and especially if you have an ESS, please contact James Marshall for a 20-minute discussion. You can call James on +61 (0) 7 3007 2000 or email email@example.com
To learn more about James, visit this link.
Resources Unearthed is a solutions hub that connects senior executives, established professionals and business owners in mining and resources with proven specialist advisers.
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.