Termination Pays. Terminations... 2

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1 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 Terminations Process Step 1 Process Normal Pay first Step 2 Determine Type of Termination and what is included Step 3 Determine Entitlements to pay Step 4 Setup Additional Payroll Categories for Termination Step 5 Calculate Tax Step 6 Process Termination in Payroll and SGC on Terminations Step 7 Terminate Employee and provide ETP if required Examples of Termination Genuine Redundancy with Gratuity and Entitlements Resignation with Entitlements of Annual Leave and LSL Redundancy and In Lieu of Notice Bundle The Institute of Certified Bookkeepers Page 1

2 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 Page 2

3 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 31 st 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 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 The Institute of Certified Bookkeepers Page 3

4 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 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. The Institute of Certified Bookkeepers Page 4

5 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 Page 5

6 ATO NAT Tax Free Threshold Limit tax-free 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 UNUSED ANNUAL LEAVE + LEAVE LOADING - Accrued up to 17/8/93 - Accrued from 18/8/93 UNUSED LONG SERVICE LEAVE - Accrued up to 15/8/78 - Accrued from 16/8/78 to 17/8/93 - Accrued from 18/8/93 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 PAYG Tax Calculation All tax at 32% All taxed at marginal rates 5% assessable taxed at marginal rates All Tax at 32% All taxed at marginal rates PAYG Tax Calculation All tax at 32% 5% assessable taxed at marginal rates All Tax at 32% Payment Summary Allocation Lump Sum Payment A Gross Payment Lump Sum Payment B Lump Sum Payment A Gross Payment Payment Summary Allocation Lump Sum Payment A Lump Sum Payment B Lump Sum Payment A 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) Tax Free Lump Sum Payment D 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 Page 6

7 (Example: Based on 1/7/2014 Tax Scales) A Annual Salary (current) $52, B Weekly Pay (current) $1, C Hourly Rate (current) $26.32 D Annual Tax (current) $9, E Tax per pay (current) $ F Total tax to date as per Payroll System $4, G Unused AL hrs $75.00 H Annual Leave amount payable (GxC) $1, I Pay periods to date incl last pay $23.00 J Avg increase in pay per week with AL (H I) $85.83 K Revised average weekly pay (B+J) $1, L Revised pay per annum (Kx52) $56, M Revised tax per annum (Use Tax Scales) $11, N Revised weekly tax (M 52) $ FINAL PAY Normal $1, Unused AL $1, Total Gross $2, Tax Deducted (N-E)xI $ Net Pay $2, 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 PAYG Tax Calculation Tax Free Tax Free ETP cap: 32% up to Threshold then 49% 17% up to Threshold then 49% Payment Summary Allocation ETP code R All ETP payments on ETP Payment Summary The Institute of Certified Bookkeepers Page 7

8 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 Under preservation Age Preservation Age or over Death Benefit ETP Non Dependants Taxable Component* All Ages Death Benefit ETP Dependants Taxable Component All Ages *Payments made to Trustee of deceased estate Use smallest of ETP cap and Wholeof-income cap: 32% up to Threshold then 49% 17% up to Threshold then 49% ETP Cap: 32% up to Threshold then 49% ETP Cap: Nil up to Threshold then 49% No tax withheld by employer ETP code O ETP Payment Summary OR Lump Dum D ETP code N ETP code D ETP code T Threshold ETP Cap $ 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 Page 8

9 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/ /7/ /6/ /7/ /6/ /7/ /6/ /7/ /6/ After 30/6/ ETP Caps (limits) As shown in the table, for 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-of- Income 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 The Institute of Certified Bookkeepers Page 9

10 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-of- Income cap. Step 1 Total taxable payments to date (excluding NON-EXCLUDED ETPs, ie wages and entitlements) $100,000 Step 2 ETP cap $180,000 less Step 1 total $80,000 Step 3 Step 2 value is less than WOI cap therefore $80,000 becomes new cap Step 4 Tax $80,000 at 32% rate $25,600 Step 5 Tax $40,000 ($120,000 golden handshake less $80,000 new cap) at 49% $19,600 rate Step 6 Total tax payable = Step 4 + Step 5 $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 3 Step 2 value is less than WOI cap therefore $23,304 becomes new cap 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 The Institute of Certified Bookkeepers Page 10

11 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) Termination Process ETP cap: 17% up to Threshold then 49% not included in whole of income cap 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 ETP Code R 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? The Institute of Certified Bookkeepers Page 11

12 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) marginal rates The Institute of Certified Bookkeepers Page 12

13 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) marginal rates Annual Leave outstanding is 4 weeks (Post 93 and No marginal rates EXAMPLE GENUINE REDUNDANCY AFTER 8 YEARS WITH LSL AND AL + GRATUITY $ JO STEVENS (OVER PRESERVATION AGE) DOB 15/07/ pre week START DATE 1/07/2005 FINISH DATE 31/12/2014 REDUNDANCY 14 WEEKS 53,846 ANNUAL SALARY $200,000 TAX FREE PORTION ($9514+($4758x9 52,336 WEEKLY SALARY $3, OVER TAX FREE PORTION 1,510 Salary YTD $100,000 TYPE 1 - ETP CAP Tax YTD $34,008 1, % 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, GRATUITY $50K = 4. 31, % 5,366 TAX 5. 18, % 10,504 TAX PERIOD OF SERVICE 9yrs 6mths TERMINATION PAY LSL 8.2 REDUNDANCY Tax FREE 52,336 LUMP SUM D LSL x Gross Wage 31,538 REDUNDANCY ETP Tax 1,510 ETP UNUSED LSL 31,538 LUMP SUM A 31/12/ weeks UNUSED AL 15,385 LUMP SUM A $15,385 GRATUITY 50,000 ETP GROSS 150,769 GROSS TAX RATE LSL 31,538 10, % PAYGW TAX 15,015 PMT SUMM AL $15,385 4, % ETP TAX 16,127 ETP NET PAY 119,627 The Institute of Certified Bookkeepers Page 13

14 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) marginal rates Annual Leave outstanding is 4.43 weeks (Post 93 and No marginal rates TERMINATION CALCULATION ANNIE MITCHELL START DATE 13/07/2002 Annual Salary $34,580 FINISH DATE 20/12/2014 Hourly Rate $17.50 Weekly Gross Wage $665 $ WEEKS WORKED 12yrs 5mths 1wk Weekly Tax $72 LSLeave 10.7 LSL x Gross Wage $7,115 20/12/14 in hours weeks $2,947 Calculation Gross Tax Gross Wage thus far $16,625 $1,800 thus far LSL $7,115 AL $2,947 NEW Total Gross $26,687 New Weekly Gross / 25 weeks $1,067 $206 tax NEW Tax to Date (25 x $204) $5,150 Less Tax thus far $1,800 TAX for LSL + AL $3,350 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

15 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 1/07/ Annual Salary $80, FINISH DATE 1/01/ Hourly Rate $40.49 YEARS OF SERVICE = 36 Years Weekly Gross Wage $1, EMPLOYER PAYS SERVERENCE 4 WEEKS FOR EVERY YEAR OF SERVICE Weekly Tax $ GENIUNE REDUNDANCY (GR) SGC SUPER? 4 weeks paid x 36 years service x weekly wage ($1538) $221, NO SGC ATO Tax Free Portion = $9,514 + ($4,758 x 36 years) $165, Lump Sum D ETP Portion is the excess = $ less (GR and LON tax free) $52, ETP ETP Tax Pre 1/7/83 Tax Free (50 months - 4 1/2 years) $6, ETP Summary ETP (TYPE 1) Tax Post 17% up to $185,000 $46, ETP Summary IN LIEU OF NOTICE (LON) $7, tax portion of ETP 2 Weeks tax free $3, Lump Sum D YES SGC LONG SERVICE LEAVE LSL less 10 weeks already taken LSL x Gross Wage $31, Lump Sum A NO SGC Tax at 32% as post 16/8/ % $10, Tax Annual Leave Outstanding Hrs weeks AL x Gross Weekly Wage $6, Lump Sum A NO SGC Tax at 32% $2, Tax Summary for this pay Gross Tax Genuine Redundancy + In Lieu of Notice $168, Lump Sum D ETP Summary $52, $7, ETP Summary Annual + Long Service Leave $37, $12, Lump Sum A Total $259, $20, 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

16 REDUNDANCY PAY FOR JOHN WELLS PAYMENT SUMMARY FOR JOHN WELLS The Institute of Certified Bookkeepers Page 16

17 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