In the unfortunate event that one of your employees suffers from a permanent disability and therefore must terminate their employment, special concessions apply to the taxation of the payment.
Part of the payment may be deemed to be an ETP but first a number of conditions must be satisfied:
The termination of employment is because of the employee’s permanent disability.
The termination of employment is before the date the employee would normally have retired because of age or period of service (early retirement is usually before age 65 or the term of contract).
Two legally qualified medical practitioners must certify that the employee’s disability is likely to prevent the employee from ever being employed in a capacity for which they are reasonably qualified because of their education, training or experience.
The tax free amount of the payment is linked to an employee’s future employment period lost due to the injury thus resulting in early retirement.
You can work out the invalidity segment of your ETP using the following invalidity formula:
Further information can be found via the ATO
The system will make this calculation for you when processing the payment through the WageEasy Termination Wizard.
Wages, Timesheet, enter all worked hours in the employee’s final pay period and click Next to get to the Ajustments screen.
On the left, select Termination, then Add. The Termination Wizard will launch, Next.
For Permanent Disability, on the Termination Information screen enter the Termination Date which is 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, if entered in the employee file. If Severance Pay is going to be paid to the employee, tick The Employee is to be Paid Severance Pay. Tick The Termination is Due to a Bona Fide Redundancy, Early Retirement Scheme, Permanent Disability or Death. Select the radio button Permanent Disability, Next.
The Last Retirement Date is the date the employee would have stopped working for the company if the permanent disability had not occurred. The system will make a calculation of the normal retirement date based on the employee birth date setup within their file. The date can be changed, i.e. if the employee was on a fixed term contract or there was an agreed date to when the employee would have finished up with the company. Select the drop down box to select an alternate date or by typing in the alternate date, Next.
If Severance Pay is going to be paid to the employee, and the The Employee is to be Paid Severance Pay box was ticked, the Severance Pay screen will automatically populated. The hours (and/or amount) can be changed on this screen, 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 overtyping the hours within the boxes. Next. 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 amend the settings within the applicable award in Setup, Award, select the Award, Edit, Leave, Leave Loading, Select the Other Tab and tick Pay on Termination and select Treat as Leave Loading in the drop-down box.
Note: 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 start at Step 1 again.
When you reach the Long Service Leave screen of the Termination Wizard, you will be given a breakdown of long service leave due to the employee as at the termination date. If the values are correct, 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 in Setup, Award, Select the Award, Edit, Leave, Long Service and select the Entitlement tab and enter a relevant entitlement period.
After correcting Long Service Leave in the Award, you will have to start at Step 1 again.
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. Next.
Note: Selection of an item on this screen will result in the amount appearing on an ETP payment summary and tax calculated at a different rate.There are two methods for calculating Tax on Annual and Long Service Leave upon termination. 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. Next.
Note: Please 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. Please note the amount will appear as an ETP payment. Next.
The Prior Life Benefit ETPs/WOIC is usually not applicable, Next.
The Termination Details screen will provide a comprehensive breakdown of the termination payment along with the tax applying to each component. This can be printed here or later printed from the employee file (Employee, Edit Employee, Select the employee, Employment, Notes and select the Termination tab). 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, then Next to preview the pay slip.
The payslip 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.
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 grey shading of the box indicates 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.