2013 End of Year Seminar Course Booklet

Transcription

1 Course Booklet P: E:

2 Table of Contents Table of Contents Key rates and thresholds for 2013/14 3 Changes to Superannuation 7 Reviews by Fair Work and the 2013 Budget 9 Backs Pays and Bonuses 11 Terminations & ETP payment summaries 16 Checklists & Handy Hints Australian Payroll Association 2

3 Key rates and thresholds for 2013/14 Key rates and thresholds In this section, we will look at the key rates and thresholds for taxes including Pay as You Go, Employment Termination Payments, Superannuation, Fringe Benefits Tax and Payroll Tax. PAYG Withholding As you may be aware, there were no changes announced in the Federal Budget to the income tax rates and thresholds for the financial year so therefore, the Pay As You Go withholding tables for most payees in the current financial year will still be current for the financial year. However, the tax tables for Higher Education Loan Program (more commonly known as HELP) and Student Financial Supplement Scheme (more commonly known as SFSS) have been updated and available on the ATO s website and can be downloaded from the ATO using the following link: The Medicare levy threshold for singles was reflected in the tax tables and there were no further changes to Medicare levy for singles announced in the Federal Budget for the year so therefore, there are no updated tables for the Medicare Levy. Now even though the Medicare levy threshold for families will change by a very small amount, there will be no updates to the tax tables and statement of formulas to reflect this change so all in all, no changes for the Medicare Levy threshold in Employment Termination Payments The ETP cap for ETP Life Benefit and Death Benefit termination payments will increase by $5,000 from $175,000 to $180,000 for the financial year. The whole of income cap remains at $180,000 keeping it in line with taxable income in the highest tax bracket. The tax-free part of genuine redundancy payment and early retirement scheme payment limit for have been released and can be located below. Figure 1: Tax-free part of genuine redundancy payments and early retirement scheme payments Income year Base limit For each complete year of service $9,246 $4, $8,806 $4,404 Just a quick note these figures may change if the government implements a new way of determining the indexation factor as was proposed in the Federal Budget Superannuation The key changes for superannuation are the increase in the superannuation guarantee charge from 9% to 9.25% effective 1st July 2013 and the removal of the upper age limit for compulsory employer contributions. A list of the increases in Superannuation Guarantee up to the year commencing 1st July 2019 are below: 2013 Australian Payroll Association 3

4 Key rates and thresholds for 2013/14 Figure 2: Superannuation increases Date Super guarantee rate Up to 30 June % From 1 July % From 1 July % From 1 July % From 1 July % From 1 July % From 1 July % From 1 July % The maximum contributions base for has been released and are detailed below. Figure 3: Maximum Contributions Base Income year Per quarter $48, $45,750 Once again, these figures may change if the government implements a new way of determining the indexation factor as was proposed in the Federal Budget Fringe Benefits Tax The current FBT year commenced on 1st April 2013 and the ATO have released the Tax Determinations which provide the key rates and thresholds for certain FBT categories. The tax determinations and a summary of FBT rates are provided below. Figure 4: FBT rates TD 2013/6: Fringe Benefits Tax: for the purposes of section 135C of the FBTAA 1986, what is the exemption threshold for the FBT year commencing on 1 April 2013? The record-keeping exemption threshold for employers that allows them to determine their aggregate fringe benefits amount based on their base year will be $7,779. TD 2013/9 - Fringe benefits tax: for the purposes of section 39A of the Fringe Benefits Tax Assessment Act 1986 what is the car parking threshold for the fringe benefits tax year commencing on 1 April The car parking threshold for the fringe benefits tax (FBT) year commencing on 1 April 2013 is $8.03. TD 2013/8 - Fringe benefits tax: what is the benchmark interest rate to be used for the fringe benefits tax year commencing on 1 April 2013? The benchmark interest rate for the fringe benefits tax (FBT) year commencing on 1 April 2013 is 6.45% per annum Australian Payroll Association 4

5 Key rates and thresholds for 2013/14 TD 2013/4 - Fringe benefits tax: reasonable amounts under section 31G of the Fringe Benefits Tax Assessment Act 1986 for food and drink expenses incurred by employees receiving a living-away-from-home allowance fringe benefit, for the fringe benefits tax year commencing on 1 April 2013: Family Groupings Reasonable ** food component Weekly Monthly Annual Statutory food component Exempt *** food component Exempt *** food component Exempt *** food component One adult * $233 $42 $191 $828 $9,932 Two adults * $350 $84 $266 $1,153 $13,832 Three adults * $467 $126 $341 $1,478 $17,732 One adult and one child * $292 $63 $229 $992 $11,908 Two adults and one child * $409 $105 $304 $1,317 $15,808 Two adults and two children * $468 $126 $342 $1,482 $17,784 Two adults and three children * $527 $147 $380 $1,647 $19,760 Three adults and one child * $526 $147 $379 $1,642 $19,708 Three adults and two children * $585 $168 $417 $1,807 $21,684 Four adults * $584 $168 $416 $1,803 $21,632 Transitional arrangements and rates for motor vehicle fringe benefits - The move to one statutory rate of 20% will be phased in over four years. There will be transitional arrangements that apply to any new commitments entered into from 10 May 2011 to 31 March Where there is a change to a pre-existing commitment these transitional arrangements will also apply. The following statutory rates should be used: Total kms travelled in Statutory % FBT year From 10 May 2011 From 1 April 2012 From 1 April 2013 From 1 April , ,000-25, ,000-40, Over 40, Australian Payroll Association 5

6 Key rates and thresholds for 2013/14 Payroll Tax With most of the State and Territory budgets being handed down in June, the current rates and thresholds you require to complete your annual returns for 2013 are: Figure 5: Payroll Tax Rates State or Territory Rate Total Annual Australian Wages Threshold Monthly Tax Threshold (Per Calendar Month) NSW 5.45% $658,000 $54,833 See note 2 VIC 4.90% $550,000 $45,833 See Note 1 QLD 4.75% $1,000,000 $83,333 SA 4.95% $600,000 $50,000 WA 5.50% $750,000 $62,500 TAS 6.10% $1,010,000 $84,167 See note 2 ACT 6.85% $1,500,000 $125,000 See Note 1 NT 5.50% $1,500,000 $125,000 Note 1: Threshold slowly phases out to the point where no reduction amount is available where total Australian wages paid exceed the following upper limits: State or Territory Upper reduction Threshold (monthly) Upper reduction Threshold (yearly) Taper rate QLD $ 416, $ 5,000, $1 in every $4 NT $ 625, $ 7,250, $1 in every $4 Note 2: The figure in the first table above is the Total Annual Australian Wages Threshold divided by 12. However, New South Wales and Tasmania calculate the monthly threshold based on the number of days in the month: Days in Month NSW Monthly Threshold TAS Monthly Threshold 28 $50, $77, $54, $83, $55, $85, Australian Payroll Association 6

7 Changes to Superannuation Changes to Superannuation Employer obligations for increases in superannuation Now we all know that the superannuation charge is increasing but what exactly does it mean for the employer and employees contractual arrangements? We will look at 3 different remuneration approaches and what effect this will have on the employer Scenario 1: Where an employment contract provides that an employee is to be paid a total remuneration package inclusive of superannuation contribution. Wording of this type is common, particularly in relation to those contracts entered into with executive level employees and usually the contract provides that an employee will receive a total remuneration package amount and that that amount may be made up of various components such as a base annual salary, superannuation contributions to be made by the employer at the minimum level required under the Superannuation Guarantee Administration Act, as well as any benefits or packaged items which the employee elects to receive via a salary sacrifice arrangement, and also any fringe benefits tax for which the employer becomes liable because of the structure of the employee s remuneration package. When this approach is taken, then strictly speaking, increases in the minimum superannuation contribution rate will be absorbed into the employee s total remuneration package and no specific amendment will need to be made to the contract to deal with those increases. Although this may seem like an ideal situation for the employer as there is no additional cost to be incurred, it does in fact result in a drop in the employee s take home pay. And as you can imagine, it is highly unlikely that the employee will be pleased with this outcome. Additionally, where a total remuneration package approach is used for employees covered by the terms of modern awards or enterprise agreements, and it is proposed that increases in the minimum superannuation contribution rates will be absorbed into the employee s total remuneration package, the employer should take care to ensure that the employee s salary or wages do not fall below any minimum wage entitlements contained in those awards or agreements. It is envisaged that employee s whose contractual terms are represented by the above scenario will be seeking to negotiate an increase in their total remuneration package to ensure that their net pay is not reduced effective 1st July 2013 and. as there will be increases in the minimum superannuation guarantee rate until the financial year, it is highly recommended that employers review the wording in their employment contracts to avoid similar discussions surrounding renegotiated remuneration packages every year. Scenario 2: Where an employment contract provides that an employee is to be paid a salary/wage plus the minimum superannuation guarantee contributions required to avoid the superannuation guarantee charge If the contract is worded in this manner, there is no need to do anything except make contributions for the employee at the increased rate. Scenario 3: Where an employment contract provides that an employee is to be paid a salary/wage plus mandatory superannuation contributions at the rate of 9% Clearly, the employer will need to make contributions at the increased rate of 9.25% and although it is not imperative to issue the employee with a new contract to reflect the increased rate, best practice would see the employer communicating the increased benefit to their employees. Superannuation and Payslip Reporting This topic has been under discussions for what appears to be forever and unfortunately, as at 27th May 2013, the government is still expecting to make further announcements surrounding this topic and they will make this information available on the ATO website as it becomes available Australian Payroll Association 7

8 Changes to Superannuation Data and E-commerce standard The government has announced that employers with 20 or more employees will be required to use the data and e-commerce standard from 1 July 2014 enabling employers to use one standard electronic format to remit contributions to all funds. Also effective 1 July 2014, the ATO will also provide integrity checks and validation services to allow employers to check their employee s personal details as well as the fund details before remitting contributions and therefore reducing the possibility of errors. Contribution Caps The superannuation concessional and non-concessional contribution caps are outlined here. Figure 6: Superannuation contributions caps Concessional contributions cap Income Year Amount of Cap $25, $25, $25, $25, $25, $50, $50,000 Non concessional contributions cap Income year Amount of cap $150, $150, $150, $150, $150, $150, $150,000 Remember, you can provide information to your employee about the contributions you have processed for them as well as what the legislated caps, however you cannot advise your employee of how much they need to contribute to reach the contributions cap because effectively, you are considered to be providing financial advice and unless you are licensed to do so, this is definitely a no-no Australian Payroll Association 8

9 Reviews by Fair Work & the 2013 Budget Review of the Fair Work Act and Budget updates Review of the Fair Work Act Back in March and April of this year, the government announced proposed changes to the Fair Work Act in relation to parental leave entitlements and flexible working arrangements, as well as increased rostering protections. Under the announced changes to the Act, the Federal Government will improve parental leave arrangements and protections for pregnant employees by: increase the entitlement for parents taking unpaid leave together from 3 to 8 weeks; allow parents to choose when they take their unpaid parental leave together; protect women at work by ensuring that they can transfer to a safe job if one is available, regardless of their length of service; ensure that women who need to take unpaid special maternity leave, prior to giving birth, are not penalised by a reduction in their unpaid parental leave entitlements; and provide employees with the right to request flexible work arrangements from their employer when they return to work after a period of parental leave. The proposed changes also expanded the right of employee s right to request flexible work arrangements. Currently under the National Employment Standards, an employee who is a parent, or has responsibility for the care of a child, may request a change in their working arrangements. Importantly, however, this request may only be made by an employee to assist them to care for their child if the child is under school age or is under 18 and has a disability. The proposed changes include extending the scope of the right to request flexible working arrangements to more categories of employees, namely: employees who are carers more generally; employees with a disability; mature age employees; and employees experiencing domestic violence. It was also proposed that employers genuinely consult with employees about the impact it would have on their family life before making any decisions to change the employee s roster or working hours. Lastly, it has been proposed that the consultation clauses in modern awards and enterprise agreements be amended to require that an employer, before making any decision to change rosters or working hours, genuinely consult with affected employees about the impact of the proposed changes on their family life. At this stage, it remains to be seen whether the proposed changes will be implemented before the Federal election to be held later this year Australian Payroll Association 9

10 Reviews by Fair Work & the 2013 Budget Budget reviews The May 2013 Federal budget held little changes for payroll personnel after the government announced that there would be no tax rate changes for the financial year. Additionally, an increase the Medicare Levy from 1.5% to 2% would be implemented from July 2014 and the proposed increase in the tax free threshold which was to commence in the financial year has now been deferred. A schedule of Income Tax Rates for the financial year and beyond is below. Figure 7: Income Tax Rates 2012/13 to 2014/ /16 Tax bracket Tax rate Tax bracket Tax rate $0 to $18,200 0% $0 to $18,200 0% $18,201 to $37,000 19% $18,201 to $37,000 19% $37,001 to $80, % $37,001 to $80,000 33% $80,001 to $180,000 37% $80,001 to $180,000 37% $180, % $180, % 2013 Australian Payroll Association 10

11 Back Pays & Bonuses Backpays and Bonuses the new NAT 3348 tax table NAT 3348 contains the tax table for back payments, commissions, bonuses and similar payments. If you recall, the ATO released NAT 3348 for the current financial year introduced Method A and Method B for the purposes of determining the correct tax to apply to backpayments, commissions, bonuses and similar payments. Method A was designed for employers who used payroll software to calculate the correct tax on the additional payments and Method B was designed for employers who processed their pays manually. The main concept of the schedule was the Method A would be applied one way if the additional payment related to the current financial year or a different way if the payment related to a prior financial year and Method B would apply for both the current and financial year. Please see below for a worked example for each scenario. Figure 8: NAT 3348 for Payments commencing 1/7/2012 Pay period Was paid Should be paid 1/4/ /4/2012 $4, $4, $ /5/ /5/2012 $4, $4, $ /6/ /6/2012 $4, $4, $ Backpay - prior FY $1, /7/ /7/2012 $4, $5, $ /8/ /8/2012 $4, $5, $ /9/ /9/2012 $4, $5, $ /10/ /10/2012 $4, $5, $ Backpay - current FY $3, Annual Bonus $ - $5, $5, Total Additional Payments $9, Method A: Withholding from the bonus payment PAYG withholding recalculation for current financial year In our example each pay period is the same so the recalculation for each period is the same Tax on earnings of $ $ Tax on earnings of $ $ Difference in tax withheld $ Additional tax to be withheld $ * PAYG withholding component for prior financial year Average normal monthly earnings including the backpay = ( * /4) $4, Tax on average monthly earnings $ Add all additional payment and divide by the number of pay periods in one year $ Add average additional earnings to average monthly earnings $4, Tax on revised average monthly earnings $ Difference in monthly tax withheld $82.00 Multiply the difference in tax by the number of pay periods in the year $ Subtract any amounts previously withheld from additional payments in the current financial year $ from the amount * Total tax to be withheld on backpay $ Australian Payroll Association 11

12 Back Pays & Bonuses Method B: Current or prior financial year averaging a backpay over the financial year 1 Determine the gross earnings for the current pay period. Ignore any cents. $4, Use the relevant tax table to find the amount to be withheld from the payee s gross earnings in step 1. $ Add any additional payments to be made in this pay period together and divide the total by the number of pay periods in the year (that is, 52 weekly pay periods, 26 fortnightly $ pay periods or 12 monthly pay periods). Ignore any cents. 4 Add the amount at step 3 to the gross earnings at step 1. $4, Use the relevant tax table to find the amount to be withheld from the amount at step 4. $ Subtract the amount at step 2 from the amount at step 5. $ Multiply the amount at step 6 by the number of pay periods used in step 3 for the withholding on the additional payment. $ Tax withheld on backpay $ In the example above, Method A and Method B arrive at the same amount of tax withheld simply because it is a very basic case where all the backpay amounts are the same. Generally, there would be a slight difference. The new NAT 3348 effective 1/7/2013 redefines the methodology as: Method A: Apply this method for any additional payments made regardless of the financial year the additional payment applies to including all back payments, commissions, bonuses or similar payments. This method calculates withholding by apportioning additional payments made in the current pay period over the number of pay periods in a financial year, and applying that average amount to the gross earnings in the current pay period. this is similar to method used in the 2012 Method B and: Method B: (i) for any back payments applied to specific periods in the current financial year. This method recalculates withholding for each pay period the back payment applies. If you are making back payments applying to current and previous financial years, apportion the back payment between those years and then use the applicable method for each component to calculate withholding. Method B: (ii) apply this method for either a) back payments that relate to a prior financial year This method recalculates withholding for each pay period the back payment applies. b) any additional payments (including commissions, bonuses or similar payments) that don t relate to a single pay period regardless of the financial year the additional payment applies to. This method calculates withholding by averaging all additional payments made in the current financial year over the number of pay periods in a financial year, and applying that to the average total earnings to date this is similar to the method used in the 2012 Method A prior financial year Additionally, if you use Method A or Method B (ii), the amount of tax to be withheld from an additional payment is limited to a maximum of 46.5% of the additional payment. If the withholding amount calculated (including a HELP or FS component) using Method A or Method B (ii) exceeds 46.5% of the additional payment being made, then the amount is reduced to be equal to 46.5% of that payment. The withholding limit applies to the additional payment only and not to normal earnings for the current pay period. You do not apply this cap when using method B (i). On quick glance, the new schedule which applies to payments made on or after 1 July 2013 appears to reverse the methodology applied in the current year s schedule meaning that the new schedule instructs the employer to use Method A for both current and prior financial year payments and Method B for additional payments that relate to either a prior financial year, or payments that do NOT relate to a single pay period regardless of whether the payments relate to the current of previous financial year Australian Payroll Association 12

13 Back Pays & Bonuses Once again, you will see the same scenario above being calculated using the new methodology prescribed in NAT 3348 for additional payments made after 1 July Figure 9: NAT 3348 for Payments commencing 1/7/2013 Using all 3 methods to calculate the tax to be withheld on all the additional payments: Pay period Was paid Should be paid 1/4/ /4/2012 $4, $4, $ /5/ /5/2012 $4, $4, $ /6/ /6/2012 $4, $4, $ Backpay - prior FY $1, /7/ /7/2012 $4, $5, $ /8/ /8/2012 $4, $5, $ /9/ /9/2012 $4, $5, $ /10/ /10/2012 $4, $5, $ Backpay - current FY $3, Annual Bonus $ - $ 5, $5, Total Additional Payments $9, Method A: any additional payments made regardless of the financial year the additional payment applies 1 Determine the gross earnings for the current pay period. Ignore any cents. $4, Use the relevant tax table to find the amount to be withheld from the payee s gross earnings in step 1. $ Add any additional payments to be made in this pay period together and divide the total by the number of pay periods in the year (that is, 52 weekly pay periods, 26 fortnightly $ pay periods or 12 monthly pay periods). Ignore any cents. ($ /12 = $798.61) 4 Add the amount at step 3 to the gross earnings at step 1. ($ $791 = $ ) $4, Use the relevant tax table to find the amount to be withheld from the amount at step 4. $ Subtract the amount at step 2 from the amount at step 5. ($984 - $711 = $273) $ Multiply the amount at step 6 by the number of pay periods used in step 3 for the withholding on the additional payment. $ The result of $3276 is less than 46.5%* = $ so therefore $3276 is the amount withhold on the bonus payment Method B (i): for Back payments applied to specific periods in the current financial year For the first affected pay period, add the back payment relevant to that period to the normal $5, earnings previously paid to get total earnings for that period. Normal earnings are gross taxable earnings and include all salary and wage income, taxable allowances, and overtime earnings for the current financial year. ($ $ = $ ) Use the relevant tax table to find the amount to be withheld from the total earnings for that period. $1, Subtract the amount previously withheld for the period from the amount at step 3.($1096-$711 = $ $385.00) Repeat steps 2 4 for each pay period affected. Total the amounts calculated in step 4 for each pay $1, period for the withholding on the back payment Australian Payroll Association 13

14 Back Pays & Bonuses Method B (ii): Withholding from a lump sum payments in arrears Calculate the average total earnings paid to your payee over the current financial year to date. $5, Ignore any cents. Average total earnings are the sum of all normal earnings paid in the current financial year, including current pay, plus any current year back payments if Method B (i) is used to calculate withholding. Then divide the total earnings by the number of pay periods to date (including the current pay period). (salary earnings to date + current financial year additional payments to date) / number of pay periods ($4,166.67*4 + $3,333.32)/4 = $5,000) Use the relevant tax table to find the amount to be withheld from the average total earnings in step 1. $ Add all additional payments made in the current financial year if Method B (ii) was used to calculate $ the withholding, to the additional payment in current pay. Then divide by the number of pay periods in the financial year (that is, 52 weekly pay periods, 26 fortnightly pay periods or 12 monthly pay periods). Ignore any cents. ($1,250 + $5,000)/12 = $520.83) Add the amount at step 3 to the average total earnings at step 1 ($5,000 + $521 = $5,521) $5, Use the relevant tax table to find the amount to be withheld from the amount at step 4. $1, Subtract the amount at step 2 from the amount at step 5. $ Multiply the amount in step 6 by the number of pay periods used in step 3. $2, The amount of tax to be withheld on the prior year backpay and bonus payment of $6,250 is $2, The result of $2124 is less than 46.5%*6,250 = $3,031 so therefore $2, is the amount withhold on the bonus payment The total amount withheld under Method A = $3,276 The total amount withheld under Method B = ($1,540 + $2,124) = $3,664 Another new concept provided in NAT 3348 is the effect on tax amounts that are effectively more that 46.5% of the gross payment. For example, if an employee with a HELP or SFSS liability receives a bonus at the end of the financial year which effectively throws their average earnings over the HELP or SFSS threshold, then ultimately, it may very well turn out that the amount of tax payable on the bonus using either of the above methodologies will result in an amount of tax that exceeds the actual gross payment!! So what the ATO have advised is that if calculating the PAYG on the additional payments using either Method A or Method B results in the tax calculated exceeding 46.5% of the gross payment, then the tax is capped at 46.5% of that gross payment. This would be because throughout the year, there have been no deductions for HELP or SFSS, and then, at the end of the year when the bonus payment increases their average weekly earnings above the HELP or SFSS threshold there is a whole year s worth of additional HELP or SFSS deductions to be made. See below for the example of a scenario where the tax calculation exceeds 46.5% of the gross payment Australian Payroll Association 14

15 Back Pays & Bonuses Figure 10: NAT 3348 for Payments exceeding the 46.5% tax rate When an employee receives a significant enough backpay/bonus/commission payment, it may have a significant enough effect on their earnings such that the tax withheld either due to HELP/SFSS deductions or simply throwing the employee into a higher bracket. Example: Employee receives $5,000 gross per month Additional bonus payment of $15,000 to be paid Normal gross earnings $5, Tax on $5,000 (+ HECS) $1, Additional payment / pay periods in year ($15,000/12 = $1,250) $1, New Monthly gross earnings $6, Tax on $6,250 (+ HECS) $1, Subtract the amount at step 2 from the amount at step 5. $ Multiply the amount in step 6 by the number of pay periods used in step 3 $7, Total tax to be withheld on bonus payment $6, Now 46.5% of $15,000 = $6,975 is less than $7,284 you will only need to withhold $6,975 from the Bonus payment 2013 Australian Payroll Association 15

16 Terminations & ETP Payment Summaries 2013 Termination payments and ETP Payment summaries When your employee leaves, there are a number of payments that you may be liable to make. It is important to understand which payment on termination of employment constitutes an Employment Termination Payment (ETP) and which payment does not. This booklet provides a summary of payments that are ETPs and payments that are not ETPs. Figure 11: Is the payment on termination an ETP? Payments that are ETPs include: A gratuity or 'golden handshake' Severance pay Non-genuine redundancy payments Payments in lieu of notice of termination Unused rostered days off (RDOs) Unused sick leave Compensation for loss of job Compensation for wrongful dismissal, provided it is paid within 12 months of the actual termination of employment Payments for loss of future super payments Payments arising from an employee's termination because of ill-health (invalidity), other than compensation for personal injury. Payments in respect of genuine redundancy or paid under an early retirement scheme that exceed the tax-free limit Lump sum payments paid on the death of an employee Payments that are not ETPs include: Accrued leave payments such as: Unused annual leave and/or leave loading unused long service leave Payments below the genuine redundancy or early retirement scheme tax-free limit Salary, wages, allowances, bonuses and incentives owing to the employee for work done or leave already taken Super benefits (for example, a lump sum or income stream from a super fund) Foreign termination payments Certain payments for restraint of trade Certain payments for personal injury if you are compensated for your inability to be employed Employee share scheme payments An advance or loan Once you have determined whether or not the payment is an ETP or not, the next step is to determine the correct tax treatment to apply to that particular payment. Now, as most of you are probably aware, on 1 July 2012, the concessional tax treatment for employment termination payments (ETPs) changed. Depending on the type of ETP, the concessional tax treatment is now limited to the smaller of the ETP cap or the whole-of-income cap. Amounts paid in excess of these caps are taxed at the highest marginal rate. In addition to the tax treatment of the ETP, the reporting of these payments on the ETP payment summary have changed and the employer is required to provide an ETP code on the ETP payment summary depending on the type of ETP the employee has received. Please refer below for a summary of ETP payments and where they appear on the ETP payment summary Australian Payroll Association 16

17 Terminations & ETP Payment Summaries Figure 12: How is the ETP reported? ETP type ETP code Age of employee as at 30 June of income year Life benefit ETPs - excluded payments Payment is because of: early retirement scheme over tax-free limits genuine redundancy over tax-free limits invalidity compensation R - for single payment or payments within the same income year S - this is a code R payment and another code R payment or code O payment or a transitional termination payment was paid in a previous income year for the same termination. Preservation age or over Under preservation age All ages Component subject to PAYG withholding Up to the ETP cap amount Up to the ETP cap amount Amount above the ETP cap amount Tax rate (including Medicare levy) Cap to apply 16.5% ETP cap 31.5% ETP cap 46.5% ETP cap Life benefit ETPs - non-excluded payments Payment is because of: non-genuine redundancy golden handshake* gratuity* payment in lieu of notice* payment for unused sick leave* payment for unused rostered days off* severance* O - for single payment or payments within the same income year P - this is a code O payment and another code R payment or code O payment or a transitional termination payment was paid in a previous income year for the same termination. Under preservation age Preservation age or over All ages Up to the relevant cap amount Up to the relevant cap amount Amount above the cap amount 31.5% Lower of ETP cap and whole-of-income cap 16.5% Lower of ETP cap and whole-of-income cap 46.5% Lower of ETP cap and whole-of-income cap Death benefit ETPs Death benefit paid to nondependant Death benefit paid to dependant N - for single payment B - subsequent payment where payment for same termination was paid in previous income year. All ages Up to the ETP cap amount Amount above the ETP cap amount D All ages Up to the ETP cap amount Amount above the ETP cap amount 31.5% ETP cap 46.5% ETP cap Nil ETP cap 46.5% ETP cap Death benefit paid to trustee of deceased estate T This ETP must be shown in the trust return, not the individual s tax return Australian Payroll Association 17

18 Terminations & ETP Payment Summaries Let s look at an example where an employee may be receiving the same ETP s but under different circumstances. Here is data for an ETP Life Benefit Payment we will look at how to treat these payments under the following situations: Scenario A Genuine Redundancy Scenario B Voluntary resignation Scenario C Death Date of Birth 8/07/1970 Length of Service 7.5 years Hourly rate $80.97 Base hours per week 38 Year to Date taxable payments $135, Notice Period 4 weeks Redundancy Pay (as per the NES) 13 weeks Unused Annual Leave 6 weeks Unused LSL 6.5 weeks Ex-gratia Payment on redundancy $50,000 Scenario A Genuine Redundancy In this situation, the employee is entitled to all of the above payments. Annual leave = $18, Long Service Leave = $20,000 LSL is payable in NSW as employment is being termination by the employer for reasons other than serious and willful misconduct Other Payments Payment in lieu of notice $12, Although the Ex-Gratia payment appears as Redundancy Pay $40, a non-excluded payment in the above table, the payment is being made in consequence Ex gratia payment $50, of redundancy and is an amount above what could be reasonably expected to be paid for a Total Redudancy pay $102, voluntary termination Australian Payroll Association 18

19 Terminations & ETP Payment Summaries Tax treatment of payments If we look at the table below, annual leave and long service leave will be taxed at 31.5% Payment type Reason Accrual dates Withholding rates (including Medicare levy) Payment summary label long service leave Annual leave Annual leave loading Normal termination (eg voluntary resignation, employment terminated due to inefficiency, retirement) Termination because of genuine redundancy, invalidity or early retirement scheme Normal termination (eg voluntary resignation, employment terminated due to inefficiency, retirement) Termination because of genuine redundancy, invalidity or early retirement scheme Normal termination (eg voluntary resignation, employment terminated due to inefficiency, retirement) Termination because of genuine redundancy, invalidity or early retirement scheme pre-16 August % of total at marginal rates B 16 August 1978 to 17 August % A post-17 August 1993 marginal rates Include in salary/ wages pre-16 August % of total at marginal rates B 16 August 1978 to 17 August % A post-17 August % A pre-18 August % A post-17 August 1993 marginal rates Include in salary/ wages 31.5% A pre-18 August % A post-17 August 1993 marginal rates Include in salary/ wages 31.5% A So tax on Unused Leave Payments is as follows: Unused Leave Tax rate Tax to withhold Annual leave = $18, % $5, Long Service Leave = $20, % $6, Tax on Other Payments: A genuine redundancy payment is, by definition, is the excess paid to the employee over what they would have received had they terminated their employment voluntarily. Now in our example, the employee would not have expected to receive any of the following payments had they voluntarily resigned so they now constitute a genuine redundancy payment of $102, Payment in lieu of notice $12, Redundancy Pay $40, Ex gratia payment $50, Total Redundancy pay $102, Australian Payroll Association 19

20 Terminations & ETP Payment Summaries Now, genuine redundancy payments are tax free up to a limit based on years of service. The current tax free limit is as follows: $8,806 + $4,404 for each completed year of service. Therefore, in our example, the tax free component is ($8,806 + $4,404 x 7) = $39,634. This leaves an amount of $62, that needs to be taxed. ($102, $39,634 = $62,673.69) Remember - payments in respect of genuine redundancy or paid under an early retirement scheme that exceed the tax-free limit are ETP s the tax free portion is not an ETP. So our ETP is now taxed under the ETP cap which for the current financial year is $175,000. As the amount is under the ETP cap, it will be taxed at 31.5% as the employee is under preservation age.. Tax on ETP 31.5% x $62, = $13, (remember, there are no cents when withholding tax) * Remember the Tax Free Component of an ETP is NOT the tax free portion of a genuine redundancy or early retirement scheme payment. The tax free component of an ETP consists of any pre-july 1983 segment plus any invalidity segment of the payment Australian Payroll Association 20

21 Terminations & ETP Payment Summaries Scenario B Voluntary Termination and the Whole of Income Cap In order to apply the correct tax treatment to these payments on termination, you will need to determine the YTD earnings for the employee. The employees YTD earnings are $120,000. Annual leave = $18, Long Service Leave = $0 There is no entitlement to LSL in NSW as entitlement to LSL would have occurred after 10 years Other Payments Payment in lieu of notice $0 The Ex-Gratia payment is a non-excluded Redundancy Pay $0 payment and thus the Whole of Income Cap applies to this payment as the payment is not Ex gratia payment $50, being made in consequence of redundancy, approved early Retirement or invalidity Total ETP $50, Unused Leave Tax rate Tax to withhold *NB this is an estimated amount based on marginal rates Annual leave = $18, Marginal tax rate $7,107* Now to calculate the tax on the Ex-gratia payment, we need to apply the smallest of the ETP cap or Whole of Income Cap. Step 1: Add up all taxable payments (excluding the ETP) paid to the employee: Year-to-Date earnings = $135, Payment for unused annual leave = $18, Total Taxable Payments = $153, Now apply the Smaller of Whole of income Cap or ETP Cap this is calculated by subtracting the Total Taxable Payment from the whole of income Cap which of $180,000. Therefore, $180,000 - $153, = $26, This means that any ETP payable will be taxed at 31.5% up to $26, and any amounts over $26, will be taxed at 46.5%. Since our ETP is $50,000, the calculation for ETP tax is as follows: $26, * 31.5% = $8,359 and the remainder of the ETP (being $50,000 $26, = $23,461.54) is taxed at 46.5% $23, * 46.5% = $10,910 Total tax on the ETP is $10,910 + $8,359 = $19, Australian Payroll Association 21

22 Terminations & ETP Payment Summaries Scenario C Death Benefit termination payment The tax treatment of death benefit payments component that is, the total death benefit amount minus any tax-free component, depends on whether the recipient of the payment is: A dependant A non dependent The trustee of a Deceased Estate If the payment is paid directly to a dependant, it will be taxed as follows: i. The amount of the taxable component that is up to the ETP cap will be tax free. ii. The tax-free component of the death benefit will not be subject to tax. iii. The amount of the taxable component that is more than the ETP cap will be taxed at the highest marginal tax rate (plus the Medicare levy). (currently 46.5%) iv. The amount of the taxable component that is up to the ETP cap will be tax free. If the payment is paid directly to a non-dependant, it will be taxed as follows: i. The tax-free component of the death benefit ETP will not be subject to tax. ii. The amount of the taxable component that is more than the ETP cap will be taxed at the highest marginal rate (plus the Medicare levy) currently 46.5% iii. The amount of the taxable component that is up to the ETP cap will be taxed at a maximum 30% (plus the Medicare levy). If the payment is paid directly to the Trustee of the Deceased Estate: The trustee of the deceased estate will receive a PAYG payment summary - employment termination payment that will show both the tax-free and taxable components of the ETP. The employer does not withhold any PAYG the trustee pays the tax (less the Medicare levy) to the ATO. The death benefit ETP cap amount is independent of the life benefit ETP cap amount. This means payments that count towards one cap will not count towards the other. It may appear overwhelming however once the concept of ETP s are understood and the correct methodology is applied, it is quite a streamlined process. The difficult part is determining whether a life benefit ETP is an excluded or non-excluded payment and, whether the ETP cap or the Whole of Income Cap applies. For example, if an employee receives an ex-gratia payment on redundancy, does it fall within the meaning of a genuine redundancy payment and therefore be subject to the ETP cap or is it an ex-gratia payment that is to be tax under the lower of the ETP cap and the whole of income cap? Additionally, you will need to determine whether other statutory entitlements exist on termination - for example, LSL may be an entitlement depending on reason for termination, the length of service and the jurisdiction where the services where performed. Below are examples for the treatment of life and death benefit termination payments and where these payments appear on the ETP payment summary Australian Payroll Association 22

23 Terminations & ETP Payment Summaries Figure 13: Summary of examples and how the ETP is reported To summarise Scenario A: Payment Amount Payable Tax to withhold PAYG Payment Summary Annual leave $18, $5, Lump Sum A = $18, Long Service Leave $20, $6, Lump Sum A = $20, ETP Payment summary and Code N/A ETP $62, $13, $42, appears as the taxable component with Code = R Tax free portion of genuine redundancy payment $39, $0.00 Lump Sum D = $39, N/A To summarise Scenario B: Payment Amount Payable Tax to withhold PAYG Payment Summary ETP Payment summary and Code Annual leave $18, $5, Salaries and Wages N/A ETP $19, $50, appears as the taxable component with Code = O To summarise Scenario C: Tax applicable when the employer makes a Death Benefit Payment to: Tax free component (pre-july 1983 segment plus any invalidity segment of the payment) Amount up to the ETP Cap Over the ETP cap amount Dependant 0% 0% Highest marginal tax rate + Medicare Levy Non-Dependant 0% 30% + Medicare Levy Highest marginal tax rate + Medicare Levy Trustee 0% 0% 0% 2013 Australian Payroll Association 23

24 Checklists & Handy Hints Checklist and Handy Hints Whether you are processing Year End payroll manually or electronically, there are several checks you need in place to ensure that your results are accurate and compliant. We will look at the measures you need to have in place first from a compliance perspective and then from an accounting perspective to ensure your reports balance. Before you issue payment summaries, there are a number of important pieces of information you will need in order to complete the payment summaries accurately. We will run through a few key points and you will find a checklist below containing the steps you need to ensure you are compliant. The checklist also offers some helpful hints that will assist in your year-end processing as the last thing anyone wants or needs - is an unhappy employee and an unhappy Tax Office! These checks specifically relate to Individual Non Business Payment Summaries however you can apply the concepts to other types of payments summaries. 1. Ensure that your employee s personal information is accurate. The ATO use the employee s Date of Birth. Tax File Number and Address to validate the information that the employee submits on their tax return as well as validating information from other agencies such as Superannuation Funds, Centrelink and Medicare. 2. Identify the period which the payments relate to if the employee commenced after the first of July or terminated before 30 June, these are the dates that should appear in the Period During Which Payments Were Made field respectfully. 3. Ensure that your employees have provided you with their Tax File Number in the event that you do not have a Tax File Number for your employee, you will need to populate the Tax File number Field with one of the options advised by the ATO. These options are contained in your booklet 4. Any payments that are reportable as per the ATO s guidelines should appear on the employee s payment summary. The most common types of payments for individuals are: a. Gross salaries and wages b. Allowances c. Reportable Superannuation contributions d. Reportable Fringe Benefits e. Lump Sum Payments As well as showing the payment you have made to your employees, you will also need to complete the fields for deductions such as Union Fees and Workplace Giving. Once again, the checklist below will assist you and provide hints to ensure that these fields are populated correctly. Once you have completed the payment summary for your employees, you will need to submit this information to the ATO via a PAYG payment summary statement which is a paper based form of lodgement. Alternatively, you can also remit this information electronically either: a. online using electronic commerce interface (ECI) b. by electronic storage media that you mail to the ATO. As well as ensuring that the information you have provided to the ATO is accurate, it is also important to ensure that internal records and the data held in your accounting records balance A good way to audit this process would be to perform reconciliations for PAYG, Superannuation and other third party payments that you may have made. There is an example below which runs through this process 2013 Australian Payroll Association 24

25 Checklists & Handy Hints Figure 14: Checklists and Handy Hints Payment summary checklist + hints Address Details - Ensure that only the following characters are used in the address details. A-Z, 0-9, space & / apostrophe,, and hyphen. Make sure that there are no full stops. Suburb, state and postcode details are to be in correct fields not in the first address line. Payee's Tax File Number - This information will come from your employee master file - Tax File Numbers must contain numbers only. No Spaces or other characters. E.g is not acceptable. It must be Payee Status and TFN: Under 18 and earns < $356 per week Commonwealth Government Pensioner New payee but 28 days have not passed No TFN quoted and no exemption claimed or does not fit into any of the above categories ABN (in the case of Business and Personal Services Income) - No spaces. Numbers only Reportable Fringe Benefits Amount This amount is the GROSSED UP taxable value. Taxable values of greater than $2,000 will equate to a grossed-up value of $3,738 and will appear on the payment summary. Reportable Employer Superannuation Contributions Superannuation contributions influenced by the employee Lump Sum Payments Lump Sum A, B, D, and E Allowance section Only allowances after tax and as well as those that have been selected to show on the PAYG Payment summary as per the ATO will show in here. Taxable allowances such as drrt, danger, crib, laundry Payment summary annual report checklist + hints You have used the correct ABN and branch number or WPN. The ABN and branch number will usually be the same one used when reporting your PAYG withholding Your PAYG withholding annual reports provide the details of all payment summaries issued to payees during the financial year. You have reported the correct year on the lodgement. You have created a backup copy of your PAYG withholding annual report as you must retain payment summary information for five years. You may also store the information electronically. You have not sent paper copies of payment summaries to the ATO if you lodge your annual report electronically. You have sent all electronic media to the ATO at the correct address along with the appropriate completed forms. Common errors when processing your PAYG annual statement electronically and helpful hints The annual report file is not on the disk - (EMPDUPE, NOABN, FRW or NRIDR) - Check the disk to ensure the annual report file is on the disk. The ATO recommends that you exit all applications and remove the disk, then reinsert the disk to view the files. This means you are viewing the files on the disk and not the files you previously accessed. Disk contains system files from your accounting package - Some accounting packages put copies of a range of system files on the disk. If this happens, remove these files. The disk should only contain the relevant annual report file. Spreadsheet, database or accounting files (for example,.xls,.dat,.db,.qbb,.myob) are not acceptable formats. File is not in a valid text format - Spreadsheet, database or accounting files (for example,.xls,.dat,.db,.qbb,.myob) are not acceptable formats. Disk only contains a shortcut to the file - Check that the annual report file on the disk is not just a shortcut to the file. An easy way to check this is by looking at the size. A shortcut will be about 1KB in size but the actual file will be at least 5KB. CD written using packet writing (UDF) format - CDs should be created using a data disk method and not packet writing (UDF), such as 'drag to disk'. Unable to supply backup copy - Save a backup copy of all annual report files to your hard drive. Files are compressed or zipped - Files must not be compressed or zipped. Floppy disk has corrupt sectors - Use new floppy disks for this purpose. Using old disks often leads to corrupt files that we cannot process Australian Payroll Association 25