Most small businesses in Australia employ people. One of the most common payroll errors is incorrect processing of termination payments when employees leave.
With the introduction of Single Touch Payroll Phase 2, getting payroll correct is more important than ever, as the data is reported directly to other government agencies. If the payroll detail is not accurate, it could affect employees’ benefits or income tax.
Final payments for employees can range from very simple to highly complex. It depends on the circumstances of the termination, the industry, the modern award or registered agreement, age and other factors.
Before you pay an employee who is leaving your business, you’ll need to gather information to ensure accuracy.
- Final date worked and reason for termination – resignation, retirement, abandonment of work, dismissal, redundancy, end of contract or medical invalidity.
- Check termination provisions in the relevant award.
- Check the National Employment Standards for the minimum notice period and redundancy pay if applicable.
- If you usually pay annual leave loading, this is also paid on termination.
- Amount of leave owing, and if there are any accrued rostered days off or time in lieu.
A termination payment can be made up of several elements:
- Final ordinary hours.
- Unused annual leave, loading and long service leave.
- Redundancy payment.
- Pay in lieu of notice.
- Unused rostered days off.
- Ex gratia payment.
- Other payments made in case of death, invalidity, or compensation or as required by certain awards.
Taxation of Termination Payments
Taxation can also be complex for final payments. Some payments are taxed at marginal rates and others at a flat rate. Special codes must be included in some termination pays to notify the ATO of payment types. For some payments, there are thresholds that must be observed that will affect the termination payment’s tax rates and taxable amount.
The best general authorities for learning more about termination payments are the Fair Work Ombudsman and the Australian Taxation Office. For more complex payroll and termination payments, our payroll specialist can help, or we can refer you to an employment law expert if needed.
Fixing termination payroll errors can be costly and time-consuming, not to mention problematic for the employee if categories or taxes are incorrect.
Talk to us before paying employees, so you get it right the first time.