Termination payments

Answer ID 31371   |    Published 25/06/2009 04:58 PM   |    Updated 17/12/2013 10:06 AM

How do I record a termination payment?

This support note describes how to process an employee's termination payment, for example when their employment has been terminated. Typically this is processed as two separate paycheques - one for the employee's final pay and the other for any unused leave entitlements.

Is this an Employment Termination Payment (ETP)? 

  • If the employee is eligible for an ETP, additional tasks are required. If you're not sure if this is applicable in your situation, speak to your accountant or the ATO.

  • If an employee was paid an ETP in the 2012-2013 payroll year, you'll need to install the 2013 compliance update before preparing your 2012-13 Payment Summaries. For more information see our support note ETP and CDEP payments for 2012/2013.

 

Want to see a termination payment in action?

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Processing a termination pay involves the following tasks:

Determine outstanding entitlements

Create payroll categories

Exempt the new payroll categories from superannuation

Exempt the new payroll categories from holiday leave accrual

Create the termination paycheque

Update the employee's card file

Prepare the employee's Payment Summary

 

Note: See how our Payroll management training course can help you learn how to set up your payroll and process your employee pay runs.


Determine outstanding entitlements

Any outstanding entitlements for the terminated employee must be taken into account when processing their termination payment, for example unused hours of holiday leave, etc. These outstanding entitlements can be identified by running the Entitlement Balance (Summary) report as follows:

  1. Go to the Reports menu and choose Index to Reports.

  2. Click the Payroll tab.

  3. Click the Balance Summary report (under the Entitlements sub-heading).

  4. [AccountRight 2011 and later only] Specify the report's date range in the Dated From and To fields. This should be the beginning and end of the current payroll year, for example 01/07/2012 to 30/06/2013. Then click Advanced.

  5. [Other versions] Click Customise.

  6. Select the terminated employee.

  7. Ensure the report's date range captures the beginning and end of the current payroll year, for example 01/07/2012 to 30/06/2013.

  8. Click Run Report or Display (as applicable). The Entitlement Balance (Summary) report is displayed showing the amount of hours owed to the employee as shown in the following example:

    Image

 

Note: Providing the Dated From and To dates on the report encompass the entire payroll year (see step 7 above), the Available Hours value on the report will represent the lifetime balance for the employee.


Create payroll categories

As termination payments are normally taxed at different rates and may not accrue Superannuation, you should create new payroll categories for these payments. It will also help you to categorise the wages correctly on the Payment Summary.

Notes:

  • The unused leave payroll categories described below may already exist in your software.

  • If you are unsure whether or not the termination payment is an Employment Termination Payment (ETP), refer to the ATO or your accountant.

 

For all termination payments, complete the following:

  1. Go to the Payroll command centre and click Payroll Categories.

  2. Click the Wages tab.

  3. Click New to create a new wages category.

  4. Name the new category Unused Holiday Pay.

  5. Select Hourly as the Type of Wages.

  6. Leave all Wages Information at their default values.

  7. Click Employee and select the employee whose employment is being terminated.

  8. Click OK.

  9. If the employee has additional outstanding entitlements, for example Unused Long Service Leave and Unused Leave Loading, repeat steps 3 to 8 to create wages categories for these and name them accordingly.

 

Note: For Unused Leave Loading the Pay Rate needs to equal the Regular Rate Multiplied by 0.1750. Our support note Setting up leave loading will help setting up leave loading.

 

For an Employment Termination Payment (ETP), also complete the following:

  1. Go to the Payroll command centre and click Payroll Categories.

  2. Click the Wages tab.

  3. Click New to create a new wages category.

  4. Name the new category ETP Taxable.

  5. Leave all other values at their default.

  6. Click Employee and select the employee whose employment is being terminated.

  7. Click OK.

  8. Repeat steps 3 to 7 to create another wage category named ETP Tax Free.

  9. Click the Deductions tab.

  10. Click New to create a new deductions category.

  11. Name the new category ETP Tax Withheld.

  12. Leave all other values at their default.

  13. Click Employee and select the employee whose employment is being terminated.

  14. Click OK.


Exempt the new payroll categories from superannuation

The categories created above may need to be exempted from accruing superannuation. Please seek advice from your accountant or the ATO to determine if this is applicable in your situation. The payroll categories can only be exempted from superannuation categories which are calculated on a % basis.

To do this:

  1. Go to the Payroll command centre and click Payroll Categories.

  2. Click the Superannuation tab.

  3. Click the zoom arrow next to the superannuation category where the wage categories are to be exempted.

  4. Click Exempt.

    Note: If the superannuation category is calculated on a dollar basis, not as a percentage, the Exempt button will be inactive.

  5. Select the applicable wage categories created above, for example Unused Holiday Pay, Unused Leave loading, ETP Taxable (as applicable).

  6. Click OK.

  7. Repeat steps 3 to 6 for all superannuation categories applicable for the employee.


Exempt the new payroll categories from holiday leave accrual

As with superannuation, if Holiday Leave Accrual is setup to be a % of gross hours, the payroll categories created above may need to be exempted to ensure no holiday leave is calculated on the termination payment. Please seek advice from your accountant or the ATO to determine if this is applicable in your situation. If the Holiday Leave Accrual is setup to be a dollar value, skip to Create the termination paycheque below.

To exempt the payroll categories created above from Holiday Leave Accrual, complete the following:

  1. Go to the Payroll command centre and click Payroll Categories.

  2. Click the Entitlements tab.

  3. Click the zoom arrow next to Holiday Leave Accrual.

  4. Click Exempt. If holiday leave accrual is calculated on a dollar basis, the Exempt button will be inactive - click Cancel and move to the next task.

  5. Select the applicable payroll categories created in Create payroll categories, for example Unused Holiday Pay, Unused Long Service Leave, Unused Leave Loading (as applicable).

  6. Click OK.


Create the termination paycheque

 

For a normal (non-ETP) termination payment

  1. Process the employee's final paycheque for the pay period as per normal.

  2. Process a separate paycheque for the unused leave.

  3. On the unused leave paycheque, zero out the values, in other words ensure there are no hour or dollar values.

  4. Enter the hours next to Unused Holiday Pay, Unused Long Service Leave, and/or Unused Leave Loading (as applicable) as determined above (Detemine outstanding entitlements).

  5. Manually calculate the PAYG Withholding. To assist with this calculation, see the ATO website for the latest articles. Our support note Tax on termination pay may also be useful.

  6. Enter the PAYG Withholding as a negative value in the Amount column as shown in the example below.

    Image 



For an Employment Termination Payment (ETP)

  1. Calculate the ETP Taxable, ETP Tax free, and ETP Tax Withheld values. To assist with the calculation, see the  ATO website for the latest articles.

  2. Enter the values into the Amount column as shown in the example below. Remember to enter the ETP Tax Withheld as a negative amount.

    Image

Specify a Termination Date in the employee's card file

Once you have finalised the employee's termination paycheque and finalised their leave entitlements, the employee's card file needs to be updated to specify a Termination Date.

  1. Go to the Card File command centre and click Cards List.

  2. Click the Employee tab.

  3. Click the zoom arrow next to the applicable employee.

  4. Click the Payroll Details tab.

  5. Enter the Termination Date.

  6. Click OK. A warning similar to the following will be displayed.

    Image

  7. Click Yes  or OK (as applicable).

Notes:

  • The above process will clear all entitlement balances (hours) for the employee, and payroll history will be purged when you start a new payroll year. However, paycheques will remain in the system until the Start a New Financial Year process has been performed.

  • In AccountRight 2011 and later, if you need to clear (remove) the Termination Date from an employee's card, for example if entered in error, click the drop-down arrow next to the Termination Date field and click Clear. See our example below.

    Image

Prepare the employee's Payment Summary

Note: If any of your employees received an ETP (Employment Termination Payment) in the 2012-13 financial year, you'll need to install the 2013 compliance update before preparing your 2012-13 Payment Summaries. For more information see our support note ETP payments for 2012/2013.

In most cases once an employee has left employment they will require a Payment Summary. The steps below are a summarised version of how to prepare a Payment Summary and ensure the payroll categories you created above are linked to the applicable paymenty summary fields. Our support note Preparing and printing payment summaries contains more details on the payment summary process.

  1. Go to the Payroll command centre and click Print Payment Summaries. The Payment Summary Assistant will be launched.

  2. At the Payment Summary Fields step of the assistant, link the payroll categories you created earlier in this support note to the applicable payment summary fields.

    Note: For more information on which payroll categories should be linked to the payment summary fields in the Payment Summary Assistant, please check with the ATO or speak to your accounting advisor. However, note that if an ETP does not have a taxable component it does not need to be selected on the Payment Summary.

  3. When you print or save the payment summaries for employees who have an ETP, a separate ETP Payment Summary will be generated for you to provide to the employee. The ETP information will also be contained in the EMPDUPE file generated for the ATO.

  4. Finalise the payment summaries as described in Preparing and printing payment summaries.




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