This article will guide you through processing terminations in the following scenarios:
Resignation: Employee resigned and will work the notice period.
Resignation: Employee resigned and will leave immediately; notice period not worked.
Resignation/Dismissal when Employer determines that notice period should not be worked.
If you need to process a termination for another reason, use the links below:
Paying out a Redundancy or Severance payment
Processing a Permanent Disability/Invalidity
Processing a termination due to Death
This article is a guide only. For more details on terminations, refer to the ATO website for information on termination payments and taxation. Alternatively, contact your accountant for professional advice.
Information you must consider on termination of employment are:
The age of the terminating employee
Unused Annual leave and Leave Loading entitlements
Unused Long Service leave entitlements
Other leave including Accrued Days off or Time in Lieu accrued
Payment in lieu of notice
Payment of Severance or ‘Golden Handshake’
Life Benefit or Death Benefit
Other items as negotiated or owed at the time of termination
The different components in a termination may attract different tax rates according to the age of the employee and the reason for termination. The taxing of leave and other payments on termination is determined by the ATO.
Important: A termination payment cannot be processed via a supplementary payslip and must be processed within the wages screen i.e. the primary payslip. If required, you can set up a new pay cycle to cater for terminations outside the normal pay period or alternatively choose the next available PPE to process the final payment using the average tax calculation option within the termination wizard.
Resignation: Employee resigned and will work the notice period
The employee has resigned. You are obliged to pay out all outstanding annual leave entitlements and other leave as specified within the award/employment agreement. The reason for termination must be recorded within WageEasy.
Go to Wages, Time Sheet.
Enter all worked hours in the employee’s final pay period
Click Next to get to the Adjustment screen.
On the left, select Termination, then Add. This will launch the Termination Wizard.
Click Next.
Enter the Termination Date as the last working day of the employee. The Employee's Birth Date and Employee's Tax File No will flow through from the employee file.
Select a STP Cessation Reason from the drop-down menu. Do not select any checkboxes or radio buttons on the Termination Information screen for a Resignation.
Click Next.
On the Termination Notice screen, by default the radio button Sufficient Notice was Given by the Terminating Party is selected, which is correct as the employee has worked the Notice Period.
Click Next.
The Annual Leave and Leave Loading screen shows the entitlements as at the termination date, based on the award the employee is linked to and balance within their employee file. These amounts can be adjusted if required, by overwriting the hours within the boxes. The leave loading entitlement will ONLY flow through if the option is selected within the award to pay leave loading on termination. If the leave loading entitlement does not appear here, close the termination wizard and review the settings within the award:
Go to Setup, Award.
Select the Award and click Edit.
Choose Leave then Leave Loading.
On the Other Tab and tick Pay on Termination and select Treat as Leave Loading in the drop-down box. Do not tick For PAYG taxation purposes treat this leave type as Leave Loading.
After correcting leave loading in the Award, you will need to return to Step 1.
When the Annual Leave and Leave Loading is correct click Next.
You will get the breakdown of Long Service Leave as at the termination date on the Long Service Leave screen. If the values are correct, click Next. If an entitlement period has been set and the employee is yet to reach the length of service, no values will appear here. If you wish to pay long service leave and there are no values on this screen, you must again close the termination wizard and amend the settings within the applicable award:
Go to Setup, Award.
Select the Award and click Edit.
Choose Leave then Long Service.
On the Entitlement tab enter the relevant entitlement period.
After correcting leave loading in the Award, you will need to return to Step 1.
If any Additional Leave Payments are required to be paid on termination, tick the box to select the leave type to be paid. The hours appear as reflected in the employee file. This would typically apply to Accrued Days Off or Time in Lieu hours. Leave Select on this screen will appear and be taxed as an ETP payment.
Click Next.
There are two methods for calculating Tax on Annual and Long Service Leave upon termination. Select the method you want to use and click Next.
Standard Method should be selected only when the employee has worked their normal hours in the pay period where the termination is processed.
If no days or only part of the normal hours have been worked in the pay period when the termination is processed, select the Average Pay over Preceding Year Method.
If there is any company Property the employee has in their possession and has not been returned, the value of the item can be deducted from the employee’s final pay by selecting the item on this screen. Click Next. Refer to the ATO’s website on permitted pay deductions from the employee’s final payout or termination payout.
Any allowances such as Gratuity or Golden handshake to be paid on termination can be selected or added by right clicking on the Allowance and Other Items screen and selecting Add an ETP Item. The amount will appear as an ETP payment. Click Next.
As the Prior Life Benefit ETPs/WOIC is not applicable to a standard termination, click Next.
The termination details screen will provide a comprehensive breakdown of the termination payment along with the tax applied to each component. This can be printed here or later from the Termination tab in Notes on the Employee file.
When you click Next on the Termination Details screen, a final Summary of the payment to be made to the employee will be shown. Click on Finish, this will return you to the Adjustment screen.
Click Next to preview the pay slip.
The Pay Slip provides the employee with information in relation to the leave balance paid out, employment cessation date and any other details relating to the final payment.
Click Save.
Once the employee has been terminated at Wages, the termination date will filter through to the Employment screen within the employee file. A termination reason can also be entered on the employee’s Employment screen by typing in the Reason field or using a reason from the drop-down arrow.
Note: The Terminate box will be shaded grey indicating that the termination was processed at Wages and this is irreversible. If subsequent payments are required, you can use the supplementary pay slip (if the termination date is within the current financial year) to process these. If the termination date is in a previous year, you will need to add the employee as a new employee.
For casual employees, it is recommended the termination date is entered manually in the Employee Details, Employment, if there is no Long Service Leave to be paid out. This will result in the date appearing on a white background. The date can be deleted if the employee returns and is re-employed by the company. The award dates can be subsequently altered to represent the new start date. Notes should be added in relation to the original employment period.
Resignation: Employee resigned and will leave immediately; notice period "not" worked.
If an employee abandons their job or gives insufficient notice to the employer, it is permissible to withhold monies from the final payment to compensate for the notice that should have been worked. Often this amount of time is dictated within employment awards or agreements and may vary according to position and age. In Wage Easy, this is set up within the award area. Setup, Awards, select the correct Award, Payments, Termination. Once set, these values will flow automatically onto the Termination Wizard, Termination Notice screen.
Follow steps above Resignation: Employee resigned and will work the notice period instructions.
At Step 9 on the Termination Notice screen select the option The Employee did Not Give Sufficient Notice, the field for the Deduction in lieu of notice is greyed out with a note appearing in bold indicating an amount (calculated by WageEasy) will need to be processed outside the termination wizard as a deduction to ensure the overall taxation treatment is correct.
Completed the Termination Wizard as per the above steps.
When you are returned to the Adjustments screen, on the left, select Allowances and select Add.
Select the Deduction in Lieu of Notice allowance and enter the amount you need to deduct.
Note: If you do not have a Deduction in Lieu of Notice allowance available in the drop-down list, you will need to create one.
In the Description box, type in the name of the allowance, then click tab on the keyboard.
An Unlisted Allowance screen will pop up. Click Yes, to add the allowance to the list.
On the Allowance Wizard screen, click Next.
Then select Standard Allowance and Next.
In the Allowance Details screen, change the Type to Deduction and tick the Taxed box. You can leave the amount as zero to reuse the allowance at another point in time. Then click Next.
On the STP Reporting screen select the Reporting Group information. Click Next.
If you do not need to setup the General Ledger Details, click Next.
Then click Finish to confirm the allowance details.
Now add the amount you need to deduct in the Amount Payable field.
Note: You may need to adjust the tax on the wages Adjustments screen to compensate for the deduction in lieu of notice amount. As the tax on the termination cannot be adjusted, you can enter a negative tax amount on the normal tax scale to reduce the overall taxation.
Resignation/Dismissal when Employer determines that notice period should not be worked.
Sometimes there is a need to dismiss an employee with immediate effect. This may be for disciplinary reasons or because to further their employment on resignation, may put the company in jeopardy for financial or other reasons. Payments of this nature may also be made in good faith to employees where the employer wishes to pay the employee extra on termination of their employment or when the employee is not required to work their notice and is paid out instead.
These amounts are considered to be an Employment Termination Payment (ETP) therefore, different tax rules are applied.
There are 2 ETP caps (limits on the tax concessions) that need to be considered, the ETP cap amount and the Whole of Income cap (WOIC). The Whole of Income cap is reduced by any other income the employee has received that is taxable in the financial year e.g. salary and wages income or other income. More information on the ETP Caps can be found on the ATO website.
The ETP cap is indexed annual and is applied to 'excluded payments' e.g. redundancy payments that exceed the tax-free threshold, invalidity, compensation and death payments and is not affected by any other payments e.g. wages, commission, leave payments upon termination. For other ETP payments the lesser of the two caps is applied.
ETP payments that do not exceed the cap are taxed at 32% or 17% depending on the employee’s age.
Follow steps above for the Resignation: Employee resigned and will work the notice period instructions.
At Step 9 on the Termination Notice screen, to pay the In Lieu of Notice, select The employer did Not Give Sufficient Notice box on the Termination Notice screen.
WageEasy will pre-fill the hours and amount fields. If you need to pay a different amount (or number of hours) e.g. 5 weeks instead of 4 weeks, you can overwrite either the Termination Notice Hours to be Paid or the Payment in lieu of notice. When you overwrite one the other value will recalculate.
Continue with the Termination Wizard, following steps above to finish the termination. In the Termination Details and Summary, you will notice that the payment In Lieu of Notice is classified as an ETP and is taxed at 32% or 17% for the amount below the cap and 47% if ETP exceeds the cap.