From time to time you will make payments to employees that are treated differently from normal wages. These payments may take the form of redundancies, payment in lieu of notice, payment of annual leave on termination, etc.. Please find following a summary of how to treat each of these items on PAYG summaries.
1. Redundancy Payment
Assuming this payment meets the ATO definition of a “genuine” redundancy, a component of the redundancy will be able to be paid tax free. You will need to work out the taxation treatment of the negotiated redundancy. Currently the ATO includes payment in lieu of notice, a “golden handshake”, and a severance payment based on the number of years worked with the employer as redundancy payments.
The ATO will allow a tax free amount to be paid to the employee, which is a fixed dollar amount plus an amount per year of service worked.
This tax free amount needs to be disclosed as a Lump Sum D on the employee’s PAYG summary. The taxable component must be disclosed as an ETP (see point two below).
Let’s work through an example.
Paul has worked for his employer for 8 years and three months. He is offered a redundancy amount in the year ending 30 June 2019 of $60,000 plus any unused annual leave. Paul is eligible to take $10,399 tax free amount plus $5,200 per year of service (current as at the 18/19 year). So the total will be $10,399 + $5,200 * 8 = $51,999 which will be paid tax free. This is the amount that gets disclosed at Lump Sum D on Paul’s payment summary. The excess of $60,000 – $51,999 = $8,001 will be considered a ETP (Eligible Termination Payment), taxed accordingly and reported on an ETP summary.
Paul also receives payment for unused annual leave of $9,600. Because the redundancy was genuine, the leave will be taxed at 32% (based on current tax rates for leave paid on termination) and disclosed at Lump Sum A. This amount is not an ETP.
2. What should we do with Paul’s ETP?
An ETP is a lump sum payment made to an employee, where the sum paid is in excess of any redundancy exemptions. In Paul’s case this ETP is $8,001. The rate of tax on the ETP will depend on the employee’s age and length of employment. An ETP includes all of the types of payments made in example 1. An ETP also includes an ex gratia, compensation for wrongful dismissal, unused RDOs, and unused sick leave.
A ETP does not include payments for unused annual leave, leave loading on that annual leave, unused long service leave, or salary owed to the employee.
An employer must provide a ETP payment summary to the employee no later than 14 days from the termination date. Most popular software packages, such as Xero and MYOB, can create the ETP electronically. The ETP is lodged with the ATO along with payment summaries at the end of each payroll year.
The ETP Cap for 2018-2019 is $205,000. This means that the maximum tax rate applicable to the first $205,000 is 31.5%, but the rate may be lower depending on the age of your employee. You will need to check the ETP tax tables to work out the correct amount of tax to deduct.
3. Payment of Annual Leave on Termination
Sally has been terminated from her job. The reason for this termination was unsatisfactory performance. She is given $4,000 in lieu of notice and is paid out $2,500 for unused annual leave.
Sally’s termination will not meet the definition of a genuine redundancy. Therefore Sally’s lieu of notice payment and unused annual leave will be treated as gross wages for PAYG summary purposes and she will be taxed at her normal marginal rate. There is no requirement to fill out an ETP form for Sally.
4. Other Lump Sums – what are they and how to treat them?
Lump Sum A – practically this code is only used when annual leave and long service leave is paid out on termination and is a result of a genuine redundancy. If leave is paid out where it accrued prior to 1993, you also should use this code, realistically this particular example would be very rare as the employee would have not used leave that accrued over 22 years ago as at 2015.
Lump Sum B – will be rarely used these days. This box should only be used if you are paying out long service leave that accrued prior to August 1978. This means that your employee would most likely be working for the employer since approximately 1968 – so a total of 50 years without using any of that long service leave!
Lump Sum D – refer to example 1 above for when to use this box. The box relates to tax free payments on account of genuine redundancies.
Lump Sum E – We do see this from time to time. This box relates to lump sum payments that were made from an employer to an employee for service rendered over 12 months ago. Any return to work payments should also be included in this area.
Best of luck preparing your more complicated PAYG Summaries and ETP payments. Remember, if you need any assistance, anywhere in Australia you can call us to book in a remote session to provide assistance. We are tax agents and Chartered Accountants. Please give us a call on 04 266 CLOUD (25683) or click here to book a session.