Payroll - Termination Pays 2014/2015 (July 2014)
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Termination Pays
Table of Contents
Terminations .................................................................................................................... 2
Types of Terminations ...................................................................................................................... 2
Notice Period of Termination ............................................................................................................ 2
Redundancy Weeks to pay............................................................................................................... 3
What’s included in a Termination?.................................................................................................... 3
Employment Termination payment (ETP) .................................................................... 4
ETP Categories ................................................................................................................................ 4
Types of ETP’s ................................................................................................................................. 4
Payment Summary Codes for ETP................................................................................................... 5
Tax on Terminations ....................................................................................................... 5
Tax Treatment on non-ETP........................................................................................................... 6
Tax Free Component/Limit ........................................................................................................... 6
Tax Treatment on ETP.................................................................................................................. 8
Tax on In lieu of Notice and Redundancy Bundle.......................................................................... 8
Preservation Age .......................................................................................................................... 9
ETP Cap Limits ............................................................................................................................. 9
Employee 65 or Over .................................................................................................................. 11
Terminations Process................................................................................................... 11
Step 1 – Process Normal Pay first .............................................................................................. 11
Step 2 – Determine Type of Termination and what is included .................................................... 11
Step 3 – Determine Entitlements to pay ...................................................................................... 12
Step 4 – Setup Additional Payroll Categories for Termination ..................................................... 12
Step 5 – Calculate Tax ................................................................................................................ 12
Step 6 – Process Termination in Payroll and SGC on Terminations ............................................ 12
Step 7 – Terminate Employee and provide ETP if required ......................................................... 12
Examples of Termination ............................................................................................. 13
Genuine Redundancy with Gratuity and Entitlements ................................................................. 13
Resignation with Entitlements of Annual Leave and LSL ........................................................... 14
Redundancy and In Lieu of Notice Bundle ................................................................................. 15
© The Institute of Certified Bookkeepers
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Payroll - Termination Pays 2014/2015 (July 2014)
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Employee Terminations
Termination pays will be different according the circumstances involved, we recommend to always
check the award or workplace agreement of the employee and the National Employment Standards.
They can be straight forward such as where the employee resigns and gives notice and they are
simply paid out any unused annual leave or unused long service leave.
Terminations are more complex where it involves a member retiring, death, dismissal or redundancy;
these situations may involve an “eligible termination payment” or ETP.
Types of Terminations
•
•
•
•
•
•
•
•
Resignation
Retirement – employee reaches a certain age though employer cannot force retirement in the
current law
Invalidity – terminates employment due to ill health (employee must have 2 medical certificates
to prove invalidity)
Abandonment – employee does not return to work and provides no explanation. After 3 days
of no contact it is considered resignation without notice
Dismissal
o Dismissal with notice – employers must give minimum period of notice
o Summary dismissal – employee dismissed on the spot for serious misconduct
o Constructive dismissal – employee resigns after threat of dismissal
Fixed Term Contract – contract ends
Redundancy – employee’s position is no longer required by the employer
Early Retirement Scheme – employers offer employees incentives to retire early or to resign
due to reorganising the business. The scheme must meet 3 conditions:1. Scheme is available to a broad group of employees
2. Scheme is implemented due to reorganising the business
3. Scheme is approved by the Commission of Taxation
Notice of Termination
If an employer is terminating an employee’s employment, proper written notice must be given and the period of
notice is dependent on the period of service. The below table outlines the minimum period of notice required.
Period of Service
Not more than 1 year
More than 1 year but not more than 3 years
More than 3 years but not more than 5 years
More than 5 years
Note: If employee is over 45 years and worked at least 2 years of continuous
service, add another week to period of notice
Period of
Notice
1 week
2 weeks
3 weeks
4 weeks
Payment in Lieu of Notice is an option for the employer rather than the employee working out the
compulsory period of notice outlined above. Payment in Lieu of Notice must be at the full rate of pay
for the hours the employee would have worked had the employment continued until the end of the
minimum notice period.
© The Institute of Certified Bookkeepers
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Payroll - Termination Pays 2014/2015 (July 2014)
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Weeks of Redundancy Pay
It is very important to check the award and/or the workplace agreement that the employee is engaged
under. You will also need to check whether there is a transitional arrangement in place between the
old award and the new modern award. If so, the employee must be paid at whichever is the higher
rate. For example, an old award may have allowed for a higher rate of severance pay than does the
current modern award. If the transitional arrangement is in place until the 31st December 2014, and
the employee is made redundant before that date, then the redundancy must be paid as per the old
award.
Many modern awards only provide for redundancy pay as per the National Employment Standards,
(NES). The table below shows the minimum payable as per the NES. Some awards or agreements
provide for several weeks’ severance pay per year of service without imposing any cap, however the
NES imposes a cap of 12-16 weeks’ pay depending on years of service. (After 10 years’ service it is
expected that the employee would be owed Long Service Leave, hence the lower rate of redundancy
pay).
Employee’s period of continuous service with the employer on termination
At least 1 year but less than 2 years
At least 2 years but less than 3 years
At least 3 years but less than 4 years
At least 4 years but less than 5 years
At least 5 years but less than 6 years
At least 6 years but less than 7 years
At least 7 years but less than 8 years
At least 8 years but less than 9 years
At least 9 years but less than 10 years
At least 10 years
Redundancy
Pay
4 weeks
6 weeks
7 weeks
8 weeks
10 weeks
11 weeks
13 weeks
14 weeks
16 weeks
12 weeks
Termination Pay Includes
•
•
•
•
•
•
•
•
Unused annual leave – up to the last day at work
Annual leave loading - if annual leave loading is normally paid then include in termination pay
(refer to modern award or enterprise agreement)
Long service leave – see state by state LSL rules
Redundancy / severance pay
RDOs (rostered days off) – any RDO’s unpaid must be paid out at termination
Pay in lieu of notice
Golden handshake – used for highly ranked executives
Unused personal leave – only if stipulated in the modern award or workplace agreement
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Employment Termination Payments
An employment termination payment (ETP) is a lump sum payment made to an employee on
termination in certain conditions.
ETP categories:
• Genuine redundancy payments in excess of the tax free amount
• Non-Genuine redundancy payment, where….
o A redundancy can be genuine from the business point of view (eg the position is
genuinely redundant), but the ATO might deem it to be a non-genuine redundancy for
tax purposes because the employee is aged 65 or older. In such a case the employee
receives all the gross pay of a normal redundancy, but the taxation is that of a
dismissal. The one exception in the taxation is that the ‘severance’ pay, being an ETP
for non-genuine redundancy, is a code “R” ETP. (A normal dismissal ETP would be
code “O”.)
o An employee resigns and a few days later the company announces redundancies, with
his position being one of them. The company offers the resigning employee their full
redundancy pay. It cannot be taxed as a genuine redundancy. The ‘severance’ pay
would be a code “O” ETP.
o An employee is on a fixed term contract and at the end of their contract, rather than
offering an extension or perhaps letting them go and employing someone else, they
make the position redundant.
o
•
•
•
•
•
An employer will sometimes make an employee “redundant” when in fact they should
have performance managed them
Unused rostered days off
Payments in lieu of notice
Ex-gratia or “golden handshakes”
Unused personal leave
Compensation for loss of job or wrongful dismissal
In order to qualify as an ETP, payment must be made within 12 months of termination date.
Payments made outside 12 months should be taxed as ordinary income at marginal tax rates. Note
that transitional arrangements for concessional taxing of ETP payments finished on 30 June 2012.
There are two type types of ETP’s
1. Life Benefit Termination Payments – Is an ETP made to an employee in consequence of the
termination of their employment for any reason other than death?
2. Death Benefit Termination Payments - Is an ETP made by an employer to a deceased
employee's beneficiaries? It is received by a taxpayer after another person's death, in
consequence of the termination of the other person's employment. It must be received no later
than 12 months after the termination.
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Payroll - Termination Pays 2014/2015 (July 2014)
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Payment Summary Codes for ETP’s
ETPs require a separate payment summary to be issued within 14 days after termination and must be
defined with the correct ETP codes as per below table.
Life Benefit ETP Codes
Code
Description (See ETP caps page5)
R
ETP made because of one of the following (Excluded ETPs)
- Early retirement scheme
- Genuine redundancy
- Invalidity
- Compensation for
• Personal injury
• Unfair dismissal
• Harassment
• Discrimination
O
Other ETP not described by R (Non-Excluded ETPs)
- Golden handshake,
- Gratuity
- Payment in lieu of notice
- Payment for unused sick leave
- Payment for unused rostered days off
Multiple Payments for Same Termination
S
You made a Code R payment to your employee in a previous income
year for the same termination
P
You made a Code O Payment to your employee in a previous income
year for the same termination
Death Benefit ETP Codes
Code
Description
D
Death benefit ETP paid to a dependent of the deceased
B
Death benefit ETP paid to a non-dependent of the deceased and you
made a termination payment to the non-dependent in a previous income
year for the same termination
N
Death benefit ETP paid to a non-dependent of the deceased
T
Death benefit ETP paid to a trustee of the deceased estate
Tax Treatment of Terminations
Tax treatment will depend on the type of termination and whether it is an ETP or not. The majority of
non ETPs use the marginal rates to calculate tax whereas ETPs tax calculation differs.
Tax on ETPs may comprise a tax free component and a taxable component.
The tax free component will apply up to the ATO limit for:
Termination due to ill-health (invalidity)
(Tax Free on ETP)
Commenced employment prior to July 1983,
(Tax Free on ETP)
therefore pre-July 1983 employment is tax free
Genuine redundancy
(Lump Sum D – See below ATO Tax Free Limit)
Early retirement scheme
(Lump Sum D – See below ATO Tax Free Limit)
© The Institute of Certified Bookkeepers
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Payroll - Termination Pays 2014/2015 (July 2014)
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ATO NAT 70980
2014-2015 tax-free limit
Tax Free Threshold Limit
$9,514 plus $4,758 for each year of completed service.
Taxable Component – the remaining balance of the ETP after the tax free component is defined, is
the taxable component; this is reported separately on the payment summary.
Tax Calculation of Terminations Payment
The table below outlines the different components of a termination payment with their tax treatment
and allocation on the payment summary.
TYPE:
Resignations,
Retirement and Dismissals
PAYG Tax Calculation
Payment Summary
Allocation
UNUSED ANNUAL LEAVE + LEAVE
LOADING
- Accrued up to 17/8/93
- Accrued from 18/8/93
All tax at 32%
All taxed at marginal rates
Lump Sum Payment A
Gross Payment
UNUSED LONG SERVICE LEAVE
- Accrued up to 15/8/78
- Accrued from 16/8/78 to 17/8/93
- Accrued from 18/8/93
5% assessable taxed at marginal rates
All Tax at 32%
All taxed at marginal rates
Lump Sum Payment B
Lump Sum Payment A
Gross Payment
PAYG Tax Calculation
Payment Summary
Allocation
All tax at 32%
Lump Sum Payment A
5% assessable taxed at marginal rates
All Tax at 32%
Lump Sum Payment B
Lump Sum Payment A
Tax Free
Lump Sum Payment D
TYPE:
Genuine Redundancy, Early
Retirement Scheme and Invalidity
UNUSED ANNUAL LEAVE + LEAVE
LOADING
- All Payments
UNUSED LONG SERVICE LEAVE
- Accrued up to 15/8/78
- Accrued from 16/8/78
GENUINE REDUNDANCY AND EARLY
RETIREMENT SCHEME From 1/7/2014
Up to limit of $9,514 + $4,758 per completed
year of services (if the payment is over the
tax free amount, the excess is an ETP)
Calculating Tax using Marginal Tax Rates
A quick method of determining the appropriate marginal tax is as follows;
1. Take normal annual salary and add termination pay to get new annual salary
2. Divide the new annual salary by 52 weeks to get the new weekly wage and determine the
difference between this tax and the normal tax (per week/fortnight/month)
3. Enter the new weekly wage amount. Note the tax payable for this new amount (either from the
software or ATO tax tables).
4. Deduct the normal weekly tax from the new amount determined above.
5. Multiply the tax difference by the number of pay periods to date. This is the amount of tax that
should be deducted from the employee’s termination pay.
© The Institute of Certified Bookkeepers
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Payroll - Termination Pays 2014/2015 (July 2014)
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(Example: Based on 1/7/2014 Tax Scales)
A
B
C
D
E
F
Annual Salary (current)
Weekly Pay (current)
Hourly Rate (current)
Annual Tax (current)
Tax per pay (current)
Total tax to date as per Payroll System
G Unused AL hrs
H Annual Leave amount payable
(GxC)
I
J
Pay periods to date incl last pay
Avg increase in pay per week with AL (H÷I)
K
L
M
N
Revised average weekly pay
(B+J)
Revised pay per annum
(Kx52)
Revised tax per annum (Use Tax Scales)
Revised weekly tax
(M ÷52)
FINAL PAY
Normal
Unused AL
Total Gross
Tax Deducted
(N-E)xI
Net Pay
$52,000.00
$1,000.00
$26.32
$9,256.00
$178.00
$4,094.00
$75.00
$1,974.00
$23.00
$85.83
$1,086.00
$56,463.00
$11,076.00
$213.00
$1,000.00
$1,974.00
$2,974.00
$805.00
$2,169.00
Tax Calculation of Employment Termination Payment (ETP)
The table below outlines the different components of an ETP termination payment with their tax
treatment and allocation on the payment summary.
EMPLOYMENT TERMINATION
PAYMENTS (ETPS)
EMPLOYMENT TERMINATION PAYMENTS
(ETP)
- Invalidity Component
- Pre 1/7/83 Component
Post 1/7/83 Component
Life Benefit ETP – Taxable Component for
Excluded-ETP
• Early Retirement Scheme
• Genuine Redundancy
• Invalidity
• Compensation for injury, unfair
dismissal, harassment or
discrimination
Under preservation Age
Preservation Age or over
© The Institute of Certified Bookkeepers
PAYG Tax Calculation
Payment Summary
Allocation
Tax Free
Tax Free
ETP code “R”
ETP cap:
32% up to Threshold then 49%
17% up to Threshold then 49%
All ETP payments on
ETP Payment Summary
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Life Benefit ETP – Taxable Component for
Non-Excluded ETP
• Golden Handshake
• Non-Genuine Redundancy
• Severance Pay
• A gratuity
• In lieu of notice* (See page 4)
• Unused Sick Leave
• Unused Rostered Days off
ETP code “O”
Use smallest of ETP cap and Wholeof-income cap:
32% up to Threshold then 49%
17% up to Threshold then 49%
ETP Payment Summary
OR Lump Dum D
Under preservation Age
Preservation Age or over
Death Benefit ETP – Non Dependants
Taxable Component*
All Ages
ETP Cap:
32% up to Threshold then 49%
Death Benefit ETP – Dependants Taxable
Component
All Ages
ETP Cap:
Nil up to Threshold then 49%
ETP code “N”
ETP code “D”
ETP code “T”
No tax withheld by employer
*Payments made to Trustee of deceased
estate
Threshold – ETP Cap $185000 or Whole of
Income Cap $180,000
(See Page 9 for explanation)
Use the lessor of the ETP Cap or
Whole of Income Cap
Tax on Payment In Lieu of Notice when bundled with Genuine Redundancy
Generally in lieu of notice payments are considered ETPs and would be included on the ETP
payment summary except when bundled with a genuine redundancy. In this case, both the genuine
redundancy and in lieu of notice payment are added together and included in the tax free portion up
to the limit based on the number of years the employee has worked for their employer. This payment
can be included at Lump Sum D on the regular payment summary.
Its important to note that the in lieu of notice can ONLY be bundled to the genuine redundancy when
the employee is seen to be disadvantaged when asked to leave immediately after being made
redundant.
The test is this: if the employee were to voluntarily resign, would they be required to work the notice
period or would they have been paid in lieu of notice?
If it can be demonstrated that it is likely the employee would be required to work the notice period,
then the pay in lieu of notice can be Lump Sum D up to the relevant cap amount. The amount over
the cap will be an ETP. For example, an administration employee would normally be required to work
their period of notice. In this case, if the employee is made redundant and paid in lieu of notice, the
payment can be part of Lump Sum D on the regular payment summary.
If it is demonstrated that the employee would have been more likely to be paid in lieu of notice if they
had resigned, the payment must remain an ETP. For example, salespeople are commonly asked to
leave immediately upon resignation; therefore this employee being made redundant would have their
in lieu of notice payment classified as an ETP.
© The Institute of Certified Bookkeepers
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Preservation Age used for ETP
Tax on the taxable component for ETP will depend on the preservation age of the employee.
Preservation age is generally the age that you can access your superannuation benefits. The
preservation age is determined using the employee’s date of birth. The following table helps
determine the preservation age.
Date of Birth
Preservation Age
Before 1/7/1960
55
1/7/1960 - 30/6/1961
56
1/7/1961 – 30/6/1962
57
1/7/1962 – 30/6/1963
58
1/7/1963 – 30/6/1964
59
After 30/6/1964
60
ETP Caps (limits)
As shown in the table, for 2014-2015 the ETP cap is $185,000 and Whole-of-Income cap (WOI)
remains at $180,000.
The taxable components of ETPs have a cap to decide the value of tax depending on the type of ETP
and the age of the employee.
There are two types of ETP caps:
ETP cap (Type 1) which is indexed annually, which are called ‘EXCLUDED ETPs.
Whole-Of-Income Cap (WOI) (Type 2) which is not indexed, which are called ‘NON-EXCLUDED
ETPs. Amounts paid in excess of these caps are taxed at the highest marginal rate (plus Medicare
levy).
The following table lists the types of ETPs subject to tax withholding and the applicable cap for each
type of payment.
Type 1 - ETP cap only $185,000
EXCLUDED-ETPS
Early Retirement Scheme that exceeds tax
free limit (only the amount that exceeds
the limit is an ETP)
Genuine Redundancy that exceeds tax
free limit (only the amount that exceeds
the limit is an ETP)
Payment made for permanent injury
Compensation for personal injury
Compensation for unfair dismissal
Compensation for discrimination
Payment made for death of employee
Type 2 - Smaller of the ETP cap and Whole-ofIncome cap $180,000 – NON-EXCLUDED ETPS
Golden Handshake (either contract, award or
recognition of service)
Non-Genuine Redundancy (see page 3)
Severance Pay
Gratuity
In lieu of Notice
Unused Personal Leave/Sick Leave
Unused Rostered Days off
The whole-of-income cap (WOI) is determined by the salary the employee has already earned,
therefore requires a few steps to calculate the cap.
Step 1 – Add all taxable payments (excluding NON-EXCLUDED ETPs)
Step 2 – Subtract Step 1 value by WOI cap $180,000 determining new cap
Step 3 – If new cap is lower than WOI cap of $180,000, then use the new cap
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Step 4 – Amounts less than the new cap are taxed at concessional rate, depending on the
preservation age, and amounts above the new cap are taxed at the highest marginal rate.
Example 1: Type 1 – ETP cap ($185,000 for 2014/2015)
Mary Jones had a serious accident at work resulting in permanent injury to her back. Her employer
has agreed to a payout of $250,000 to compensate for her injury. Mary Jones is under the
preservation age.
Payout for permanent injury is considered an ETP cap Type 1, therefore the first $185,000 is taxed at
32% and then the remainder $65,000 is taxed at 49%
Example 2: Type 2 – Choice of ‘smallest cap’ between ETP cap & Whole-of-Income (WOI) cap
Aidie Large, under preservation age, has been terminated. Wages to date are $50,000 and
outstanding entitlements are $50,000. Aidie was also paid $120,000 as a ‘golden handshake’, which
has no tax free component.
Therefore, as the golden handshake is an ETP – Type 2, we are required to calculate the Whole-ofIncome cap.
Step 1
Step 2
Step 3
Step 4
Step 5
Step 6
Total taxable payments to date (excluding NON-EXCLUDED ETPs, ie
wages and entitlements)
ETP cap $180,000 less Step 1 total
Step 2 value is less than WOI cap therefore $80,000 becomes new cap
Tax $80,000 at 32% rate
Tax $40,000 ($120,000 golden handshake less $80,000 new cap) at 49%
rate
Total tax payable = Step 4 + Step 5
$100,000
$80,000
$25,600
$19,600
$45,200
Example 3: Type 2 – Multi payments with both ETP cap and Whole-of-Income cap
Billy, over preservation age, has been made redundant after 5 years. Termination payment of
$70,000 includes $45,000 genuine redundancy and $25,000 gratuity. Wages to date are $140,000
and outstanding entitlements are $5,000.
As the genuine redundancy holds a tax free portion and is classified as an ETP cap (excluded ETP)
this must be dealt with first.
Step 1
Genuine redundancy amount over tax free limit ($45,000 – $33,304
$11,696
($9,514+ (5yrs x $4,758))
Step 2
Billy is over preservation age and $11,696 is under $185,000 ETP Cap
Step 3
Tax on $11,696 at 17%
$1,988
Gratuity payment of $25,000 is considered a non-excluded Whole-of-Income cap (WOI), therefore the
following steps are required.
Step 1
Total taxable payments to date (excluding non-excluded ETPs) $157,634
$156,696
($140,000 + $5,000 + $11,696-excluded ETP = taxable payments)
Step 2
WOI cap $180,000 less Step 1
$23,304
Step 2 value is less than WOI cap therefore $23,304 becomes new cap
Step 3
Step 4
Therefore portion of Gratuity of $25,000 is $23,304 taxed at 17% rate
$3,961
Step 5
Remaining gratuity of $$1,696 taxed at 49% rate
$831
Step 6
Total tax payable = Step 4 + Step 5
$4,792
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Employee 65 or Over
An employee 65 or over issued a genuine redundancy or early retirement scheme are not eligible for
the tax free limit on the payout. Due to their age, the termination is treated as a normal termination
which requires any Unused Leave is taxed at marginal rates and not a flat rate of tax.
However, the ATO does make one concession for this aged employee and that is the severance can
be a code “R” ETP. This means that although they don’t get it tax free, they at least can have up to
$185,000 of severance at 17% tax. Note, this severance value should not be included in ‘whole of
income cap’ calculation if there is a non-excluded ETP in the payout.
Below is the ATO ruling re the exception for this code “R” ETP: ATO ETP Cap Limits
Employee 65 or Over
PAYG Tax Calculation
Payment Summary
Allocation
UNUSED ANNUAL LEAVE + LEAVE
LOADING
- Accrued up to 17/8/93
- Accrued from 18/8/93
All Tax at 32%
All taxed at Marginal Rates
Lump Sum A
Gross Payments
UNUSED LONG SERVICE LEAVE
- Accrued up to 15/8/78
- Accrued from 16/8/78 to 17/8/93
- Accrued from 18/8/93
5% assessable taxed at marginal rates
All tax at 32%
All taxed at Marginal Rates
Lump Sum B
Lump Sum A
Gross Payments
GENUINE REDUNDANCY AND EARLY
RETIREMENT SCHEME From 1/7/2014
(no tax free limit)
Possible other Non-Excluded ETP for over
65 payout
- A gratuity
- In lieu of notice* (See page 4)
- Unused Sick Leave
- Unused Rostered Days off
Threshold – ETP Cap $185,000 or Whole
of Income Cap (WOI) $180,000
(See Page 9 for explanation)
ETP cap:
17% up to Threshold then 49%
“not included in whole of income
cap”
ETP “Code” R
Use smallest of ETP cap and Wholeof-income cap:
17% up to Threshold then 49%
Use the lessor of the ETP Cap or
Whole of Income Cap
Termination Process
Step 1 – Process Normal Pay
Process the employee’s normal pay first. This is recommended so their entitlement balances are
updated before the termination pay.
Step 2 –What Type of Termination and What is Included
• Unused annual leave – calculate outstanding AL
• Unused long service leave – calculate LSL and check if unpaid leave or LSL was taken over
the employment service—refer to state LSL laws
• ETP – Is it a genuine redundancy? If so, how much severance pay is required?
• ETP – Is payment in lieu of notice involved?
• ETP – Are there any unpaid RDOs? If so, how many days/weeks?
• ETP – Does the award or agreement include unpaid personal leave on termination?
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It is recommended when terminating an employee through payroll software that you have separate
categories for each termination component. This allows each component to be either exempt from
tax, not included in SGC superannuation calculations and flagged to be excluded or included on
payment summaries.
Some wage categories that may be required include:
ETP Genuine redundancy
(wage type)*
ETP In lieu of notice
(wage type)*
ETP Unused personal leave
(wage type)*
ETP Gratuity
(wage type)*
ETP Tax
(deduction)*
*set up ETP wage categories to be exempt from PAYG withholding tax
**it is important that the tax relating to an ETP is not included in the normal PAYG Withholding
tax category. (See above schedule for tax on terminations).
Note: All ETPs and ETP tax are to be included in W1 or W2 of the BAS.
Step 3 – Determine Entitlements
Determine outstanding leave categories (i.e., unused annual, long service, personal if applicable, and
rostered days off), either through the payroll software or manually. Online long service leave
calculators exist for most states.
Step 4 – Set Up Employee for Payroll Categories
Add the required payroll categories such as unused AL or LSL and any ETP categories as
determined in Step 2 to the employee’s file. Check the correct allocation or exemption of
superannuation guarantee to each category.
Step 5 – Calculate Tax
Calculating tax depends on the reason for the termination and in most cases when recording a
standard termination pay, it will be necessary to adjust the PAYG Withholding tax that the software
calculates automatically. The tax will be calculated at either marginal rates or a flat rate, see above
tables to determine type of calculation. You must manually calculate the tax amount applicable to
each payroll category when processing a termination pay.
Step 6 - Process Termination Pay
Enter the number of hours in the unused annual leave category and then adjust the tax to the
calculated amount in step 5.
Check ICB Superannuation Document for SGC calculation on Terminations (Note: Unused annual,
personal and long service leave is EXEMPT from superannuation)
Enter amounts for ETP components. Remember to use the ETP tax category for these amounts.
If an ETP is involved, produce the ETP payment summary and provide to the employee within 14
days of termination date. The regular payment summary is provided to the employee at the end of
financial year
Step 7 - Terminate Employee
Enter the termination date in the employee’s payroll information. The termination date will be picked
up by the software for the payment summary information.
(Post ’93) Tax @ marginal rates
© The Institute of Certified Bookkeepers
Page 12
Payroll - Termination Pays 2014/2015 (July 2014)
__________________________________________________________________________________________
Examples of Termination
is 4 weeks (Post ’93 a
GENUINE REDUNDANCY + GRATUITY + ENTITLEMENTS
Jo Stevens was made redundant after 8 years from a Victorian business. Her
termination included a ‘gratuity’ payment of $50,000. Award uses NES standards
She started on 1/7/2005 and finished date is 31/12/14
Long Service Leave in weeks is 7.4 weeks (Post ’93) Tax @ marginal rates
Annual Leave outstanding is 4 weeks (Post ’93 and No LL) @ marginal rates
EXAMPLE
GENUINE REDUNDANCY AFTER 8 YEARS WITH LSL AND AL + GRATUITY $500 200000 16666.67
JO STEVENS (OVER PRESERVATION AGE)
16666.67
DOB
15/07/1959
3846.154 pre week
START DATE
1/07/2005
FINISH DATE
31/12/2014
REDUNDANCY 14 WEEKS
53,846
TAX FREE PORTION
($9514+($4758x9 52,336
OVER TAX FREE PORTION
1,510
TYPE 1 - ETP CAP
1,510
17.00%
ANNUAL SALARY
WEEKLY SALARY
$200,000
$3,846.15
Salary YTD
Tax YTD
$100,000
$34,008
257 TAX
TYPE 2 - SMALLEST OF ETP CAP AND WHOLE OF INCOME CAP (WOI) FOR GRATUITY
1. TAXABLE PAYMENTS YTD
148,433
(GROSS INCL YTD+LSL+AL+REDUNDANCY OVER LIMIT)
2. WOI CAP $180k
31,567
3. GRATUITY $50K =
4.
31,567
17.00%
5,366 TAX
5.
18,433
49.00% 10,504 TAX
PERIOD OF SERVICE
LSL
LSL x Gross Wage
9yrs
TERMINATION PAY
REDUNDANCY Tax FREE
REDUNDANCY ETP Tax
UNUSED LSL
4 weeks UNUSED AL
$15,385
GRATUITY
GROSS
RATE
32.00%
PAYGW TAX
32.00%
ETP TAX
NET PAY
6mths
8.2
31,538
AL
@ 31/12/14
152
LSL
AL
GROSS
31,538
$15,385
TAX
10,092
4,923
© The Institute of Certified Bookkeepers
52,336 LUMP SUM D
1,510 ETP
31,538 LUMP SUM A
15,385 LUMP SUM A
50,000 ETP
150,769
15,015 PMT SUMM
16,127 ETP
119,627
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Payroll - Termination Pays 2014/2015 (July 2014)
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RESIGNATION with AL and LSL
Annie Mitchell has resigned from a Victorian business at which she has worked for
11 years, 5 months and 1 week
She started on 13/7/2002 and finished date is 20/12/14
Long Service Leave in weeks is 10.7 weeks (Post ’93) Tax @ marginal rates
Annual Leave outstanding is 4.43 weeks (Post ’93 and No LL) @ marginal rates
TERMINATION CALCULATION
ANNIE MITCHELL
START DATE
FINISH DATE
13/07/2002
20/12/2014
WEEKS WORKED
LSLeave
LSL x Gross Wage
ALeave
@ 20/12/14 in hours
Calculation
Gross Wage thus far
LSL
AL
NEW Total Gross
New Weekly Gross / 25 weeks
NEW Tax to Date (25 x $204)
Less Tax thus far
TAX for LSL + AL
•
•
12yrs
5mths
1wk
Annual Salary
Hourly Rate
Weekly Gross Wage
Weekly Tax
$34,580
$17.50
$665
$72
10.7
$7,115
168.394 4.431421 weeks
$2,947
Gross
$16,625
$7,115
$2,947
$26,687
$1,067
$5,150
$1,800
$3,350
Tax
$1,800 thus far
$206 tax
Payment Summary – All Gross Wage is W1
Unused Annual leave and Long Service Leave are not
included in SGC Superannuation Calculations.
© The Institute of Certified Bookkeepers
Page 14
$
Payroll - Termination Pays 2014/2015 (July 2014)
__________________________________________________________________________________________
REDUNDANCY and IN LIEU OF NOTICE
John Wells has worked for a NSW company for 36 years and has been made
redundant due to resizing of the company. The company pays 4 weeks severance
for every year of service and paying 2 weeks In Lieu of Notice.
Annual Leave Outstanding is 4.2 weeks
Long Service Leave is 30.3 weeks less 10 weeks already taken = 20.3
Genuine Redundancy is 4 weeks x 36 years x $1538
REDUNDANCY WITH IN LIEU OF
NOTICE
JOHN WELLS aged 61 YEARS (OVER
PRESEERVATION AGE)
START DATE
1/01/1979
FINISH DATE
1/01/2015
1/07/1983
5.6
Annual Salary
$80,000.00
35
Hourly Rate
Weekly Gross
Wage
$40.49
YEARS OF SERVICE = 36 Years
EMPLOYER PAYS SERVERENCE 4 WEEKS FOR EVERY YEAR
OF SERVICE
Weekly Tax
GENIUNE REDUNDANCY (GR)
4 weeks paid x 36 years service x weekly wage
($1538)
$221,538.46
ATO Tax Free Portion = $9,514 + ($4,758 x 36 years)
$165,544.00
$1,538.46
$361.00
SGC SUPER?
NO SGC
Lump Sum D
ETP
ETP Portion is the excess = $221538 less (GR and LON tax free)
ETP Tax Pre 1/7/83 Tax Free (50 months - 4 1/2
years)
$52,917.54
$6,299.71
ETP Summary
ETP (TYPE 1) Tax Post 1/7/83 @ 17% up to $185,000
$46,617.83
ETP Summary
$7,925.03
tax portion of ETP
$3,076.92
Lump Sum D
YES SGC
$31,276.92
Lump Sum A
NO SGC
$10,008.62
Tax
IN LIEU OF NOTICE (LON)
2 Weeks tax free
LONG SERVICE LEAVE
30.33
LSL less 10 weeks already taken
20.33
LSL x Gross Wage
Tax at 32% as post 16/8/78
Annual Leave Outstanding Hrs
32.00%
160
4.21
weeks
AL x Gross Weekly Wage
$6,477.73
Lump Sum A
Tax at 32%
$2,072.87
Tax
Summary for this pay
Gross
Genuine Redundancy + In Lieu of Notice
$168,620.92
0
ETP Summary
$52,917.54
$7,925.03
Annual + Long Service Leave
$37,754.66
$12,081.49
$259,293.12
$20,006.52
Total
NO SGC
Tax
Lump Sum D
ETP Summary
Lump Sum A
Note: A payment in lieu of notice is an Employment Termination Payment (ETP) and any payments which are ETPs
and meet the conditions for payment under a genuine redundancy are tax free up to a limit based on the number of
years the employee has worked for their employer. In this case, the employment is being terminated under a Genuine
Redundancy so the payment in lieu of notice (along with any genuine redundancy payment) will be tax-free up
to the limit and any amount over the limit will be the ETP and taxed at the applicable rate.
© The Institute of Certified Bookkeepers
Page 15
Payroll - Termination Pays 2014/2015 (July 2014)
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REDUNDANCY PAY FOR JOHN WELLS
PAYMENT SUMMARY FOR JOHN WELLS
© The Institute of Certified Bookkeepers
Page 16
Payroll - Termination Pays 2014/2015 (July 2014)
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ETP – EMPLOYMENT TERMINATION PAYMENT FOR JOHN WELLS
References:
ATO Tax on ETP
ICB Guide on Long Service Leave
ICB Employee Termination Template
ICB Superannuation Document
© The Institute of Certified Bookkeepers
Page 17