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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TAPS Helpline – Car Allowance
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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TAPS Helpline – Car Allowance
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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TAPS Helpline – Child Support
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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TAPS Helpline – Child Support
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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TAPS Helpline – Child Support
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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TAPS Helpline – Service Casual to Permanent
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
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.
TAPS Helpline – Service Casual to Permanent
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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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TAPS Helpline – Overpayments
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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TAPS Helpline – Overpayments
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
At least 3 years <4 years 7 weeks
At least 4 years <5 years 8 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.
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