Terminations - Payroll

Terminations

Presented by ROSS GIBSON

Here are the facts!

Average Pay $6,250 per month + $5,000 Unused leave and Claiming Tax-free Threshold MARGINAL RATES CALCULATION

Average Pay: 6,250

Gross amount to be taxed: 5,000

Plus 5% Lump Sum B: + 0

Taxable Termination Pay: = 5,000

Average Termination Pay: 416

Average Pay + Average Term Pay: 6,666 Tax: 1,599

Average Pay: 6,250 Tax: 1,456

Difference in Tax: 143

TOTAL TAX PAYABLE: 1,716

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3 34%

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TAPS Helpline – Car Allowance

Should an employee’s payment of unused annual leave on termination be calculated using the rate for: • Salary only, or • Salary + Car Allowance?

To answer this you will need to refer to the employee’s contract and more importantly, how you apply it to the real world.

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Fair Work Act states: Section 90 Payment for annual leave: (1) “… an employee takes a period of paid annual leave, the employer must pay the employee at the employee’s base rate of pay …”

(2) “…when the employment of an employee ends, the employee has a period of untaken paid annual leave, the employer must pay the employee the amount that would have been payable to the employee had the employee taken that period of leave.”

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Salary $52,000 p.a. plus Car allowance of $15,600 p.a.

Method Amount per week Car Allowance

Pay on working weeks only $325 x 48 $15,600

Pay on taking annual leave $300 x 52 $15,600

Both methods are correct!!

Non-Excluded ETP (Type O)

ETP

Excluded ETP (Type R)

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Employment Termination Payments

Ordinary Pay (incl Bonus & Commissions)

Annual Leave and Leave Loading Long Service Leave

If its not a payment for…

It’s an ETP 8

An ETP may include:

Payments in lieu of notice

Compensation for wrongful dismissal

Gratuity or golden handshake

Unused personal carers leave

The excess amount of the lump sum D tax free amount

Unused RDOs

Payments made on death of an employee 9

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Excluded ETP Code R

Indexed figure: $205,000

Non-excluded ETP Code O

Whole of Income cap: $180,000

• Excess over Lump Sum D

• Settlement payments

• Unfair dismissal

• Discrimination

• Harassment

• Personal injury

• Invalidity

• Everything else!

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Excluded ETP Code R

Indexed figure: $205,000

Non-excluded ETP Code O

Whole of Income cap: $180,000

$180,000

Less year-to-date income $

Less value of AL, LL & LSL $

Threshold Amount $

$205,000

17% or 32%

47%

$ ETP payment

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GENUINE REDUNDANCY CRITERIA (JOB HAS BEEN ABOLISHED)

The dismissal occurs before the employee turns

65, and before the employee would

have had to retire anyway

The payment is greater than the amount which

would have been payable had the

employee voluntarily

resigned at the same time.

No agreement for later employment

ITAA Section 83-175

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COMPLETED YRS BASE RATE + SERVICE RATE TAX-FREE PORTION

1 $10,399 (1 x $5,200) $15,599 2 $10,399 (2 x $5,200) $20,799 3 $10,399 (3 x $5,200) $25,999 4 $10,399 (4 x $5,200) $31,199

GENUINE REDUNDANCY AND EARLY RETIREMENT SCHEME PAYMENTS: (not applicable for Invalidity Payments)

Limit: $10,399 + $5,200 per completed year of service

11 months $10,399 - $10,399

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Resignation Redundancy Include in Lump Sum D?

Sales Manager PILON PILON No

Receptionist Work notice period PILON Yes

TAPS Helpline – What can be included in the Lump Sum D?

‘Is this a payment due to redundancy?’

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TAPS Helpline – Taxing non-excluded items on redundancy

One of our Sales Managers, William is being made redundant. He has been with the business for 5 years. William is being given $120,000 as payment in lieu of notice, regardless of his termination reason. Do I tax the payment in lieu of notice as: • An ETP? or • Include the payment in the tax-free portion?

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TAPS Helpline – Taxing non-excluded items on redundancy

PAY ITEMS GENUINE REDUNDANCY

37yo

Severance Pay: $ 80,000

Ex-gratia payment: $ 30,000

Unused Personal Leave: $ 15,000

Total payments due to redundancy: $125,000

Lump Sum D: [($5,200 x 5yrs) + $10,399] $ 36,399

Excess (Excluded ETP Type R): $ 88,601

Tax Withheld: $ 28,352

Age at End of Financial Year is 37 < Preservation Age is 60 @32%

Payment in lieu of notice of $120,000 cannot be included in

the Lump Sum D calculation.

It will need to be taxed separately as a

Non-excluded ETP!

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ITEMS INDEXED FIGURE WHOLE OF INCOME

$205,000 $180,000

Less Year-to-date income: $ 60,000

Less Taxable value of any AL, LL or LSL: $ 10,000

Less Excluded ETP: $ 88,601

Threshold Amount: $116,399 $110,000

GROSS TAX RATE TAX

17%

$110,000 32% $35,200

$ 10,000 47% $ 4,700

$120,000 TOTAL $39,900

Compare the two caps…

Taxing the Non-excluded ETP

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TAPS Helpline – Redundancy payments to employees over 65 years

We are making a number of employees redundant. One of our employees, Charles, is 69 years old and has been with the business for 5 years. Is this a non-genuine redundancy? What is the difference between genuine and non-genuine redundancies when calculating the payment?

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PAY ITEMS NON-GENUINE REDUNDANCY

NON-GENUINE REDUNDANCY

Severance Pay: $80,000 $80,000

Ex-gratia payment: $30,000 $30,000

Unused Personal Leave: $15,000 $15,000

Total payments due to redundancy: $125,000 $125,000

Lump Sum D: [($5,200 x 5yrs) + $10,399] $36,399 $ 0

Excess (Excluded ETP Type R): $ 88,601 $125,000

Tax Withheld: $ 28,352 $ 21,250

@32% @ 17%

TAPS Helpline – Redundancy payments to employees over 65 years

Remember, annual Leave and long service leave will be taxed at marginal rates with a non-genuine redundancy!

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TAPS Helpline – Multiple Redundancy Payments

Kate, one of our executives has been made redundant after 8 years of service. As part of their termination and due to cash flow issues, Kate has agreed to receive her ex-gratia payment by two instalments. Payment# 1 $140,000 to be paid on 20th June 2018 Payment# 2 $140,000 to be paid on 20th July 2018

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PAYMENT #1 - June 2018 $140,000

Lump Sum D : (8 x $5,078) + $10,155: $ 50,779

Excess (Excluded ETP Type R): $ 89,221

Total Tax on ETP @ 32%: $ 28,551

Total Tax on ETP @ 47%:

PAYMENT #2 - July 2018 $140,000

Lump Sum D: Current Financial Year: (8 x $5,200) + $10,399: Less Previous Financial Year ATO limit:

$ 51,999 $ 50,779

$ 1,220

Excess (Excluded ETP Type R): $138,780

ETP taxed @ 32% on 1st $205,000 ($205,000 - $89,221 = $115,779): $ 37,049

ETP taxed @ 47% on $23,001: $ 10,810

Total Tax on ETP: $ 47,859

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SUMMARY PAYMENT #1 PAYMENT #2 TOTAL

Taxable Component: $ 89,221 $138,780 $228,001

Tax: $ 28,551 $ 47,859 $ 76,410

Net: $ 60,670 $90,921 $151,591

ETP Code: R S

Use Code Use when you are currently paying… and you have previously paid…

S: An Excluded ETP (Code R) a code R or O payment was paid in the previous financial year to the employee for the

same termination P: A Non-excluded ETP (Code O)

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Are staff allowed to salary sacrifice their termination pay into their superannuation fund? For example long service leave or an ex gratia payment? Possibly…

TAPS Helpline – Salary Sacrifice Arrangement

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TAPS Helpline – Salary Sacrifice Arrangement

‘Effective SSA’ – involves the employee agreeing to receive part of their total amount of remuneration as benefits before the employee has earned the entitlement to receive that amount as salary or wages.

Taxation Ruling: 2001/10 “Starting 01 November 2017, I would like to sacrifice 100% of all future annual leave accruals that will be paid out to me on termination of employment.”

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TAPS Helpline – Child Support

Is Child Support deducted from the employee’s termination pay? Or just from their ordinary hours in their regular pay?

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Contact Dept. Human Services when… Child Support can be deduction from…

Employee intends to leave Salary or Wages

Resigns / Terminates Commissions

Change in Pay Cycle Bonuses & Allowances

Change in Employment Status Retirement or Termination

Change in Business (e.g. merger, etc.) Contract labour

Deductions vary Other remuneration

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Deduction notice

Schedule of Child Support Deductions (subject to Protected Earning Amount)

Notice Pursuant to Section 72A: This is a fixed percentage or dollar amount from any payments due to the employee. The Protected Earnings Amount does not apply in this case.

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Alex is on a salary of $1,250 per week. 5 weeks on unused annual leave.

A Section 72A is received for a lump sum amount of $2,000.

Unused Annual Leave $6,250

Tax @ marginal rates $2,132

Less Child Support $2,000

Net payment to employee $2,118

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TAPS Helpline – PAYG Variation

One of our employees has a PAYG Variation for the current financial year for 15% PAYG on Salary & Wages. Can I apply the 15% to the employee’s termination pay? Possibly…

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TAPS Helpline – Superannuation on Leave Loading

We pay annual leave loading when an employee takes annual leave. We also pay super on the leave loading. Is the leave loading superable if the employee terminates? No, the annual leave loading forms part of the unused annual leave on termination and is not part of the OTE definition. Therefore, no super is applicable to the annual leave or to the leave loading.

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TAPS Helpline – Service Casual to Permanent

One of our redundant employees has the following history: Hired as a Casual: 01/08/11 Permanent status: 09/09/16 Termination date: 01/11/18 Are they entitled to a redundancy as they were casual for most of his employment?

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There is no precise legal definition of a “casual worker”. It is accepted that a “casual” is hired on an informal, uncertain and irregular basis: - Irregular patterns of work - No expectation of ongoing employment - Series of separate contractual engagements

http://www.google.com.au/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiFsfvFms_PAhVFmBoKHYBGDRUQjRwIBw&url=http://www.rocketwatcher.com/blog/2010/06/how-do-cmos-define-product-marketing.html&psig=AFQjCNHE-X7nKiWvH5ohdbmP6fcB-2ydfQ&ust=1476153495613577

AMWU v Donau Pty Ltd Background: A number of permanent shipyard employees that were being retrenched had prior periods of service as casuals, working on a regular and systematic basis, with no break between the casual and permanent periods of service.

- Casuals are not entitled to severance pay under the FWA s123(c) - During their casual employment these employees received a 25% casual loading.

Decision: A period of continuous service as defined by the FWA s384(2)(a) includes a period of regular and systematic casual employment.


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TAPS Helpline – Payment in Lieu of Notice

• How do I calculate the payment in lieu of notice?

• Is unpaid leave included when calculating the service period?

• Does the payment accrue annual leave and long service leave?

• Do I calculate superannuation on the payment?

• What is the termination date?

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TAPS Helpline – Payment in Lieu of Notice

Payment in Lieu of Notice

Same value,

if worked

Term date is last day at work

No Accruals

Super is applicable

What about the extra week if the employee is over 45 and worked 2 years

continuous service? Clerks Private Sector Award states: 13.2 The notice of termination required to be given by an employee is the same as that required of an employer except that there is no requirement on the employee to give additional notice based on the age of the employee concerned.

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TAPS Helpline – Overpayments

How do I process an overpayment for an employee that is terminating? Can I just deduct it from their termination pay or do I need their permission first? This is all about Permitted deductions FWA s324(1)(a) states: An employer may deduct an amount from an amount payable to an employee…if the deduction is authorised in writing by the employee.

• Immediately reverse Gross/Tax/Net • The employer benefits from a reduction in the amount of PAYG

in the next payment to the ATO • The employee repays Net debt from Net Pay

Current Financial

Year

• Immediately reverse Gross $ only • Unable to reverse PAYG since the financial year is closed • Issue an amended payment summary to the employee • The employee has received the benefit of higher PAYG amount • The employee repays Gross debt from Net Pay

Previous Financial

Year

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TAPS Helpline – Overpayments Is there a requirement for the employee to repay the debt?

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PREVIOUS FINANCIAL YEAR CURRENT FINANCIAL YEAR

Item Paid Should Pay Overpayment Item Paid Should Pay Overpayment

Gross $4,000 $2,000 $2,000 Gross $5,000 $3,000 $2,000

Tax $1,500 $1,000 $ 500 Tax $2,000 $1,500 $ 500

Net $2,500 $1,000 $1,500 Net $3,000 $1,500 $1,500

Employee repays the Gross amount from their Net pay. Employee repays the Net amount from their Net pay.

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Pay all outstanding entitlements

Apply the appropriate tax

Deduct the overpayment (Gross or Net as required) from the Net pay

Fair Work Ombudsman states: “An employer can be liable to a

penalty of up to $63,000 per contravention”

- Ending Employment Fact sheet.

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TAPS Helpline – Bonuses

William was made redundant earlier in the year.

He qualified for a Short Term Incentive payment which is related to completing a project during employment.

Is the bonus to be taxed as: • Marginal rates? or • An ETP? or • Tax-free (Lump Sum D)?

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BONUS MARGINAL RATES LUMP SUM D (Redundancy)

or ETP (Termination)

• Bonus for work-related

performance

• Short Term Incentive Bonus

• Sign-on Bonus

• Referral Bonus

• Retention Bonus

• Non-qualifying Bonuses but given as an Ex-gratia payment

TAPS Helpline – Bonuses

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TAPS Helpline – Unpaid leave effect on Service

Harry is being made redundant. Commenced: 15/04/2014 Redundant: 14/10/2018 Harry had previously taken 12 months of unpaid leave to travel overseas.

Is the period of unpaid leave included in the length of service for calculating notice and severance entitlements?

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HARRY

Employment period: 4.5 years

Less Unpaid leave 1.0 year

Service period: 3.5 years

NOTICE

Period of continuous service

Minimum notice period

1 year or less 1 week

More than 1 year – 3 years 2 weeks

More than 3 years – 5 years 3 weeks

More than 5 years 4 weeks

REDUNDANCY

Period of continuous service

Redundancy pay

At least 1 year <2 years 4 weeks

At least 2 years <3 years 6 weeks



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TAPS Helpline – Notice Period: Contact Vs NES

An employee’s contract states that on termination the employee is entitled to a payment to the equivalent of 3 months salary. Under the Fair Work, the NES states that we owe the employee a minimum of 4 weeks notice. What is the employer obligated to pay? The NES amount for 4 weeks or the Contract amount for 3 months?

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TAPS Helpline – Notice Period: Contact Vs NES

The contract is far more generous to the employee than the NES in regards to the notice period.

“Is the employee better off overall”? The employee would be receiving a far greater value for the 3 months at their base salary rather than the 4 weeks as a payment in lieu of notice.

The employee would have no recourse as they are receiving more at the base salary than the value of the payment in lieu of working the minimum period.

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TAPS Helpline – Q & A

QUESTION ANSWER Does HELP get applied to an employee’s termination?

No. HELP is applied to a marginal rates calculation for a bonus, but not on a termination.

Can an employee’s final day be a public holiday?

Yes. The physical last day at work will be the prior day. The official termination date is the public holiday. Leave will accrue up to and including the public holiday.

Can I withhold monies due on termination if the company property has not been returned?

No. Most awards allow for unworked notice to be deducted from termination pay, but there is no mention of a deduction for not returning company property.

Documents

Terminations - Payroll