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AccountRight Plus and Premier, Australia only

This is task 3 of 7 for processing a final pay (see previous task or an overview of all tasks).

Termination payments are normally taxed at different rates and may not accrue superannuation. Also, different types of payments are reported separately to the ATO. You may need to create several new payroll categories, particularly if the termination is an ETP, to ensure you report payments correctly. What is an ETP?

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Rules, tax and other complexities

Final pays can get complicated so we recommend you speak to an accounting advisor about the specifics of your final pay—particularly if the final pay includes an ETP.

To learn about tax on final pays, see this ATO information. For the rules, calculators and other final pay resources, check the Fair Work website.

Payroll categories you might need to set up

  • Unusead leave—If the employee whose leaving has unused annual leave, you'll need to set up a wage category for each type of unused leave you're paying them.
  • ETP tax withheld—If the employee's final pay includes an ETP, you'll need to create a deduction category to track the tax you withhold from their ETP.
  • ETP taxable and ETP tax free—If the employee's final pay includes an ETP, you'll need to create wage categories for the taxable and tax-free components of the payment.

Lump Sum A payments

An unused leave payment might be classified by the ATO as a lump sum A. To clarify this for the final pay you're preparing, check with an accounting advisor or the ATO.

When paying lump sum A amounts, you also need to report the reason for the employee's termination as part of reporting this amount. Terminations can be one of two types, redundancy or termination. A redundancy type includes bona fide redundancy, approved early retirement or invalidity payments. A termination type includes all other termination reasons (such as resignation).

To report the termination payment type, you need to create a termination payroll category for each amount that will be included as part of a Lump Sum Payment A amount. When creating a category, give it a name that identifies the payment type. For example, if you need to create a wage category for unused annual leave pay for a bona fide redundancy payment, use a name such as ‘Unused Annual Leave Pay (R)’, where (R) indicates a redundancy type.

You'll also need to assign the applicable ATO Reporting Category to each Lump Sum Payment A payroll category. If you're not sure what to assign, check with your accounting advisor or the ATO.

Learn more about lump sum payment types.

 

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titleTo create unused entitlements payroll categories

To create unused entitlements payroll categories

These wage categories might already exist in your company file, so all you'll need to do is make sure they're set up correctly and assign them to the employee who's leaving.

But if needed you can create them from scratch.

  1. Go to the Payroll command centre and click Payroll Categories. The Payroll Category List window appears.
  2. Click the Wages tab.
  3. If there's already a category for unused leave, click the zoom arrow to open it. Otherwise click New to create a new wage category. The Wages Information window appears.
  4. Type the name of the wage category in the Wages Name field.

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    If you're creating a payroll category to record a Lump Sum Payment amount, give the payroll category a name that clearly identifies the payment type, such as ‘Lump Sum Payment A’. 

  5. Choose the type of wages—Salary or Hourly—according to the type of payment: Hourly for unused annual leave amounts.
    Unused Wage Category

  6. Choose the applicable ATO Reporting Category for this wage type. If unsure, check with your accounting advisor or the ATO. For more info, see Assign ATO reporting categories for Single Touch Payroll reporting.

  7. Click Employee. The Linked Employees window appears.

  8. In the select column ( ), click next to the employee who is leaving.
  9. Click OK and then OK again. The Payroll Category List window reappears with the new payroll category in the list.
  10. If you're creating a payroll category to pay an entitlement balance (such as unused annual leave), and the payroll category used to accrue the entitlement is set up to calculate leave based on a percentage of gross hours, you need to exclude the new payroll category from the entitlement accrual calculation.
    1. Click the Entitlements tab. The list of entitlement payroll categories appears.
    2. Select the payroll category used to calculate the accrual, for example, Annual Leave Entitlement, and click Edit. The Entitlements Information window appears.
    3. Click Exempt. The Entitlements Exemptions window appears. If the Exempt button is not active, it means the entitlement category is not set up to calculate leave based on a percentage of gross hours.
    4. In the select column ( ), select the payroll category to exclude this payroll category from being included in the entitlement accrual calculation.
      Entitlement exemption window with unused leave wage category selected
    5. Click OK and then OK again. The Payroll Category List window reappears.
  11. Repeat from step 2 for each required termination payroll category. 
  12. When you've added all required categories, proceed to task 4: Exclude termination payroll categories from superannuation calculations.
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titleTo create ETP payroll categories

To create ETP payroll categories

(Only required if the payment is classified by the ATO as an ETP)

Create these 3 payroll categories:

  1. Go to the Payroll command centre and click Payroll Categories.
  2. Click the Wages tab.
  3. Click New to create a new wage category.
  4. Name the new category ETP Taxable.
  5. Choose the applicable ATO Reporting Category for this wage type. If unsure, check with your accounting advisor or the ATO. For more info, see Assign ATO reporting categories for Single Touch Payroll reporting.
  6. Leave all other values at their default. If required, you can override the default wages account for this category by selecting Optional account. If unsure, speak to your accounting advisor.
  7. Click Employee and select the employee whose employment is being terminated.
  8. Click OK.
  9. Repeat steps 3 to 7 to create another wage category named ETP Tax Free.
  10. Click the Deductions tab.
  11. Click New to create a new deduction category.
  12. Name the new category ETP Tax Withheld.
  13. Choose the applicable ATO Reporting Category for this deduction. If unsure, check with your accounting advisor or the ATO. For more info, see Assign ATO reporting categories for Single Touch Payroll reporting.
  14. Ensure the Linked Payable Account has the applicable account specified. You can leave all other values at their default.
  15. Click Employee and select the employee whose employment is being terminated.
  16. Click OK.
  17. When you've added all required categories, proceed to task 4: Exclude termination payroll categories from superannuation calculations.

 

When you're done, find out how to exclude termination payroll categories from superannuation calculations.

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4. Exclude termination payroll categories from superannuation calculations

Processing termination payments

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