Terminations

Presented by Ross Gibson C.P.S. The Association for Payroll Specialists TAPS Helpline – How to Tax Annual Leave & LSL

REDUNDANCY, RESIGNATION, APPROVED EARLY ITEM DATES RETIREMENT, RETIREMENT, DISMISSAL INVALIDITY

Annual Leave Post 8/93 Marginal rates 32% Pre 15/8/78 5% at marginal rates Long Service Leave 16/8/78 to 17/8/93 32% 32% Post 8/93 Marginal rates 32%

2

I’ve had enough.

I resign!

3

Scenario MARGINAL RATES CALCULATION • Average Pay $2,200 • Claiming tax-free threshold • $10,200 Unused annual leave • Weekly paid employee Average Pay: $ 2,200

Gross amount to be taxed: $ 10,200

Plus 5% Lump Sum B: + $ 0

Taxable Termination Pay: = $ 10,200

Average Termination Pay (Divide Term Pay/52): $ 196

Average Pay + Average Termination Pay: $ 2,396 Tax: $ 698

Average Pay: $ 2,200 Tax: $ 621

Difference in Tax: $ 77

TOTAL TAX PAYABLE (Multiply the difference x 52): $ 4,004 (39.2%)

4 5 ETP

Non-Excluded ETP Excluded ETP (Type O) (Type R)

6 Employment Termination Payments

If its not a payment for…

Ordinary Pay (incl Bonus & Commissions)

Annual Leave and Leave Loading

Long Service Leave

It’s an ETP

7 An ETP may include:

Payments in lieu Compensation for of notice wrongful dismissal Unused personal Gratuity or golden carers leave handshake

The excess amount of the Unused RDOs lump sum D tax free amount Payments made on death

of an employee 8 Non-Excluded ETP Excluded ETP (Type O) (Type R)

Everything else !! • Excess over Lump Sum D • Settlement payments*

• Unfair dismissal • Discrimination

• Harassment • Personal injury

• Invalidity

*Not for Pain & Suffering

9 WHOLE OF INCOME CAP

10 WHOLE OF INCOME CAP EMPLOYMENT TERMINATION PAYMENTS Pre 1/7/83 Tax Free Post 1/7/83 17% up to the threshold and 47% thereafter Employee is at or over the preservation age Employee is under the preservation age 32% up to the threshold and 47% thereafter

PRESERVATION AGE Before 1 July 1960 55 1 July 1960 – 30 June 1961 56 1 July 1961 – 30 June 1962 57 1 July 1962 – 30 June 1963 58 1 July 1963 – 30 June 1964 59 From 1 July 1964 60 11 WHOLE OF INCOME CAP Scenario: Lex is a 62yo wealthy, power-mad business magnate that has been dismissed for poor performance after 5 years of service.

As part of his termination pay he will be receiving: • $50,000 Ex-gratia payment • $25,000 Payment in lieu of notice

Remember! The 1st Step: Is there any Pre 1/7/83 service?

12 ADDITIONAL INFORMATION ETP $75,000 Date of Birth: 1st April 1956 Employee’s age at the End of the Financial Year: 62 Employee’s Preservation Age: 55 Is the employee Over or Under their Preservation Age? Over Year to Date Income: $130,000 Unused leave paid on termination $20,000

DATE OF BIRTH PRESERVATION AGE Before 1 July 1960 55 1 July 1960 – 30 June 1961 56 1 July 1961 – 30 June 1962 57 1 July 1962 – 30 June 1963 58 1 July 1963 – 30 June 1964 59 After 1 July 1964 60

13 WHOLE OF INCOME CAP: $ 180,000 Less Year To Date Income: $130,000 Less Taxable Value of any AL, LL & LSL: $ 20,000 Individual Threshold Amount: $ 30,000

$75,000 ETP payment

47% $30,000 threshold 17%

14 $75,000 ETP payment

47% $30,000 threshold 17%

ETP $75,000 ETP PAYMENT $75,000 Tax the 1st $30,000 @ 17%: $ 5,100 Tax : Excess $45,000 @ 47%: $ 21,150 Total Tax on ETP: $26,250

15

Hey Robin, One of us has been made Is it me? redundant…and it’s not me…

16

REDUNDANCY PAYMENTS

GENUINE REDUNDANCY AND EARLY RETIREMENT SCHEME PAYMENTS: (not applicable for Invalidity Payments)

Up to a limit of $10,155 + $5,078 per completed year of service

COMPLETED BASE RATE + SERVICE RATE TAX-FREE YRS PORTION 1 $10,155 (1 x $5,078) $15,233 2 $10,155 (2 x $5,078) $20,311 3 $10,155 (3 x $,5,078) $25,389 4 $10,155 (4 x $5,078) $30,467

17 A payment can only go into Lump Sum D if they are only receiving the payment because they are being made redundant.

RESIGNATION REDUNDANCY Include in Lump Sum D?

Sales Manager PILON PILON No

Receptionist Work notice period PILON Yes

18 INDEXED FIGURE

The ETP cap for 2017-18 is $200,000. Your ETP is taxed at a lower rate up to $200,000. ETP amounts above the caps are taxed at the top marginal tax rate.

19 PAY ITEMS $ Severance Pay (12 weeks): 46,905 Payment in Lieu of Notice (4 weeks): 16,030 Ex-gratia payment: 20,000 Total payments due to redundancy: 82,935 Lump Sum D: [(5,078 x 10) + $10,155] 60,935 Excess (Excluded ETP Type R): 22,000

$200,000 Indexed threshold

32%

$22,000 ETP payment

20 $200,000 Indexed threshold

32%

$22,000 ETP payment

PAY ITEMS $ Date of birth: 5th July 1985 Employee’s age at the end of the financial year: 32 Employee’ Preservation Age: 60 Employee is Over or Under the Preservation Age: Under Excess (Excluded ETP Type R): 22,000

Tax the ETP $22,000 @ 32% 7,040 21 SPLITTING ETP’S OVER FINANCIAL YEARS Scenario: Thor Odinson is a 34yo storm-weather god of sky and thunder whose position has been made redundant .

As part of his termination pay he will be receiving a $300,000 ex-gratia payment.

Due to cash-flow issues, Thor agreed with the company to be paid by 2 instalments of $150,000.

Payment #1: 20th June 2017 Payment #2: 20th July 2017

22 PAYMENT #1 - June 2017 $150,000 $150,000 Lump Sum D : $ 59,626 (10 x $4,969) + $9,936: Excess (Excluded ETP Type R): $ 90,374 Total Tax on ETP @ 32%: $ 28,920

PAYMENT #2 - July 2017 $150,000 $150,000 Lump Sum D: Current Financial Year: (10 x $5,078) + $10,155: $ 60,935 Less Previous Financial Year ATO limit: $ 59,626 $ 1,309 Excess (Excluded ETP Type R): $148,691 ETP taxed @ 32% on 1st $200,000 ($200,000 - $90,374 = $109,626): $ 35,080 ETP taxed @ 47% on $39,065: $ 18,361 Total Tax on ETP: $ 53,441

23 SUMMARY PAYMENT #1 PAYMENT #2 TOTAL Gross: $150,000 $150,000 $300,000 Tax: $ 28,920 $ 53,441 $ 82,361 Net: $121,080 $ 96,559 $217,639

DESCRIPTION TOTAL $

Gross: $300,000 Lump Sum D: $ 60,935 Taxable Component: $239,065 Tax: $ 82,361

24 SETTLEMENT PAYMENTS Scenario: Peter Parker resigned from the Daly Bugle two months ago.

After resigning, he went to Fair Work with claims that he was unfairly treated by Editor-in Chief, Jameson.

The court investigated the claims and has awarded Peter a settlement payment of $210,000.

25 ADDITIONAL INFORMATION Date of Birth: 25th May 1990 Employee’s age at the End of the Financial Year: 28 Employee’s Preservation Age: 60 Is the employee Over or Under their Preservation Age? Under

$210,000 ETP payment

47% $200,000 Indexed threshold 32%

26 INDEXED FIGURE: $200,000 ETP PAYMENT $210,000 Tax the 1st $200,000 @ 32%: $ 64,000 Tax : Excess $10,000 @ 47%: $ 4,700

Summary: ETP Type (R) ETP Payment: $210,000 Total Tax on ETP: $68,700

27 28 TAPS Helpline – Bonus paid on termination

Question: We have employee whose position was made redundant and needs to be paid a Short Term Incentive Bonus, which they earned in 2016/17.

This bonus is related to completing a project during employment.

Is the bonus to be taxed as: • Redundancy pay? • Marginal rates? or • An ETP? 29 TAPS Helpline – Bonus paid on termination

Answer: The bonus will be taxed at marginal rates.

This is because the bonus is due to the project completing.

It does not form part of an ETP.

The bonus has its very own tax table: Schedule 5 – Tax table for back payments, commissions, bonuses and similar payments NAT 3348

30 TAPS Helpline – Bonus paid on termination

BONUS PAID MARGINAL RATES LUMP SUM D

• Bonus for work-related • Retention Bonus

performance • Short Term Incentive Bonus • Non-qualifying Bonuses but given as an Ex-gratia payment • Sign-on Bonus • Referral Bonus

31 TAPS Helpline – Genuine Redundancy

Question: We have a full-time Food & Beverage Manager position which has been made redundant due to cost-cutting measures.

The employee was successful in obtaining a position as a casual house-keeper with the same company.

Is this a genuine redundancy since they secured an alternative role?

32 TAPS Helpline – Genuine redundancy

Answer:

Redundancy: the state of being no longer employed because there is no more work available.

TWO Criteria

• the job you are doing no longer exists; and

• your employment is to be terminated

33 The Full-time Food & Beverage Manager

has 2 choices…

Accept redundancy Accept the offer of Casual House-keeper - Severance pay - No termination - Lump Sum D - Service date continues - Entitlements paid - Bonus at marginal rates ATO Genuine Redundancy (TR2009/2)

Conditions for a genuine redundancy payment (section 33)

The basic requirement for a genuine redundancy include:

• there is no arrangement entered into between the employer and the employee (or the employer and another entity) to employ the dismissed employee after the termination

• the dismissed employee is not older than specified age limits TAPS Helpline – Company property not returned

Question: Can the employer withhold the employee’s final pay (in part or full) whilst awaiting the return of company property?

The employment contract states: “Upon termination of the employment relationship, you are required to return all property in you possession or control belonging to the employer. If all property is not returned upon conclusion of your employment, final wages may be withheld until such time all property is returned”.

36 TAPS Helpline – Company property not returned

Answer: The contract does not: • quantify the value of the property • provide a reasonable period to returned • The FWO requires an employee to be paid their final pay on their last day or in the next pay period • Some modern awards permit an employer to withhold the value of unworked notice. Other than that, payment must be made in full. 37 TAPS Helpline – Salary Sacrifice Termination Pay

Is an employee allowed to sacrifice all of their termination pay into their superannuation fund?

38 Salary Sacrifice Arrangements - ATO TR2001/10 Item Rule ETP No. Employees have not been able to roll-over ETPs since 2012.

Lump Sum D Why would you want to? Tax on Lump Sum D = nil Tax on employer super = 15%

Unused Leave Employees must comply with TR2001/10

39 Salary Sacrifice Arrangements - ATO TR2001/10

‘Effective SSA’ – an effective SSA involves the employee agreeing to receive part of his or her total amount of remuneration as benefits before the employee has earned the entitlement to receive that amount as salary or wages.

40 Sacrificing Leave on Termination

• An employee who had the foresight to put a salary sacrifice arrangement for unused leave on termination in place years ago would be able to sacrifice that portion of their termination pay.

• Not many employees think to do this, even if they are aware of the regulations.

Starting 19 October 2016, I would like to sacrifice 100% of all future annual leave accruals that will be paid out to me on termination of employment. 41 TAPS Helpline – Failure to give notice

Question: What happens if the employee does not give sufficient notice or if they just do not want to work out their notice?

Answer: An employee may request that the notice period be waived.

This can be mutually agreed between the employee and employer and the employee would go off on their happy way.

42 TAPS Helpline – Failure to give notice

Answer: Some Awards, Enterprise Agreement or contracts may allow the employer to deduct monies from the employee’s final pay, equivalent to the notice not given.

Example: Banking, Finance and Insurance Award 2010:

11.2 Notice of termination by an employee …If an employee fails to give the required notice the employer may withhold from any monies due to the employee on termination under this award or the NES…

43 TAPS Helpline – Failure to give notice

Answer: Net Termination pay: $

*Less Gross Notice: $

Final termination Pay: $

*This follows the same rules as an overpayment This is a debt owing to the business. The ATO is missing out on the PAYG

44 TAPS Helpline – Termination and Public Holidays

Question: We have an employee who resigned on 28th March 2017 and gave 4 weeks notice taking her last day to 25th April 2017 (Anzac Day).

Should the employee get paid for the public holiday or only pay the employee up to 24th April 2017?

45 TAPS Helpline – Termination and Public Holidays

Answer: The employee is entitled to the public holiday as per the Fair Work Act s116.

The public holiday forms part of the notice period and is included in the payment (even though they will only be physically working until 24th April 2017.

46 TAPS Helpline – Purchased Leave on Termination

Question: We have an employee that has purchased additional annual leave throughout the year.

At what rate do we tax the unused purchased annual leave on termination?

47 TAPS Helpline – Purchased Leave on Termination

Answer: Any unused balance of purchased annual leave on termination is treated the same as annual leave: • Resignation: taxed @ marginal rates (as a lump sum) • Redundancy: taxed @32%

Points to consider: • Does the employee need to use the purchased leave first and then the other annual leave? • What happens if the employee receives a salary increase during the year?

48 TAPS Helpline – Purchased Leave on Termination

“Trainer’s Leave” Scenario: • Trainer’s receive 1 week additional leave due to their travel commitments.

Conditions: • The leave needs to be taken within 12mths or is lost.

49 Employment Termination Payments

If its not a payment for…

Ordinary Pay (incl Bonus & Commissions)

Annual Leave and Leave Loading

Long Service Leave

It’s an ETP

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