Xero has come a long way over the last few years, and now offers the ability to process a redundancy pay in Xero and/or a redundancy with an ETP.
Here is a worked example:
Kate has worked for XYZ Pty Ltd for just over one year. Kate is made redundant and this is considered a genuine redundancy. She is given 2 weeks in lieu of notice and 4 weeks redundancy pay. Kate is paid $3,000 per week so she will be paid a total of $18,000 on account of the redundancy. Based on the 18-19 threshold Kate will be able to take $10,399 plus $5,200 for a total of $15,599 tax free. The excess of the $18,000 over the $15,599 tax free amount will be paid as an eligible termination payment.
How to process in Xero:
Step 1: Go to payroll settings and add a pay item called Eligible Termination Payment – Type R
Step 2: Ensure the employee’s annual leave is correct as showing as owing in Xero
Step 3: Set up an unscheduled pay run for the terminated employee. Click into the pay and choose Final Pay. Tick the box that says genuine redundancy. You will see that the unused annual leave automatically pre fills into the pay screen.
Step 4: Remove the normal pay if necessary. In the prefilled line that says redundancy, enter the tax free amount. In Kate’s situation, this is $15,599. Add a pay item called Eligible Termination Payment – Type R and add in the ETP amount. For Kate, this is $2,401.
Step 5: Adjust the tax if needed to match your manual calculation. Redundancy amounts are tax free. The tax on the ETP – Type R is 32% and the tax on unused annual leave is also 32% (these rates are current for the 18/19 year).
Step 6: Add in a fixed calculation for super to accrue super on the In Lieu of Notice amount. Super needs to be paid on this amount, but not on the ETP or the Redundancy.
Xero will automatically add the redundancy amount in Lump Sum D box on the PAYG summaries and will add the unused annual and long service leave in the Lump Sum A box on the PAYG summaries. If you have processed an ETP Xero will issue a separate ETP summary for the terminated employee.
Calculating the redundancy amount and the tax on the redundancy is a complicated exercise, and we would highly recommend engaging both an HR professional to advise on the legitimacy of the redundancy and an accountant to advise on the taxation of the proposed amount payable.
CloudCounting can assist you on the calculation and processing of this amount in Xero. Please give us a call on 04 26 625 683.