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Bona fide redundancy, approved early retirement and invalidity |
  
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Bona fide redundancy, approved early retirement and invalidity |
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DEFINITIONS
Bona fide redundancy
To be a bona fide redundancy payment, the payment must be made to an employee who is 'dismissed' (or a situation where the employee had little or no option to resign). Therefore the payment of an amount upon the completion of a fixed term contract cannot be a bona fide redundancy payment. The dismissal must also be:
- prior to normal retirement age (eg 65) or before the completion of an agreed set period of service, whichever is earlier.
- because the position was made redundant
The conditions of payment are also quite defined:
- the payment must exceed an amount which would have been paid to the employee had they voluntarily retired or resigned
- there must be no agreement between the employee and the employer for later re-employment
- if the employee and employer are related the payment must not exceed the amount that would have been paid if they had not been related
Approved early retirement
To receive a payment as part of an early retirement scheme it will need to be approved by the Commissioner of Taxation, who will consider whether the following conditions have been satisfied:
- the scheme was offered to all employees in general and not just a select few
- the aim of the scheme should be to enable the employer to re-organise the workplace
- the scheme must not have been started before being submitted for approval
The conditions of the payment are the same as for bona fide redundancy above.
Invalidity
An invalidity payment is one made to an employee who, due to a diminished physical or mental capacity, is no longer able to perform the required duties. Two legally qualified doctors must certify that the disability is likely to prevent the employee from ever being employed in a capacity that would normally would be able to provide. In addition, the termination of employment must have occurred before the date the employee normally would have retired.
PAYMENTS
Pay Out Of Unused Annual Leave (With Or Without Loading)
The dollar value of this payment will be taxed at approximately 31.5% and whether or not the leave loading is taxed will depend upon if the employee's leave loading YTD as a result of the pay exceeds $320 (leave loading is tax free upto $320 in any one financial year). The money from the payment is to show in Lump Sum A on the employee's payment summary. The pay rate to choose is Term. A/L + Load Bef 8/93 Screen Capture OR Term. A/L Before 18/8/93 Screen Capture. You will notice that description of the pay rate alludes to annual leave accrued before August 1993. You can edit the pay rate and change this description before using it, if you like.
If a payment in lieu of notice (ETP) is made then it is possible that annual leave may continue to accrue for the period to which the payment relates. The employer should check with the ATO and the administrative body of the award that the employee falls under, if this applicable. If so, then before using any termination annual leave pay rates, put the ETP pay rate(s) in first, so as to ensure that the annual leave balance (up the top right of pay envelope) is updated. See Payments in Lieu of Notice (below).
Pay Out Of Unused Long Service Leave
The balance of long service accrual needs to be divided up into two portions. Those hours accrued before 16/081978 and those hours accrued on and thereafter. Once the separate figures are available then these will be what is put into the qty field for the respective pay rates to be used. These pay rates are below:
- Pre 16/08/1978 Pay Type No. 13 Term. L/S Bef 8/78 Screen Capture
- Post 15/08/1978 Pay Type No. 14 Term. L/S Betw 1978 & 93 Screen Capture (The description of this pay rate can be changed before using it in the pay envelope, by editing that pay type)
If a payment in lieu of notice is made then it is possible that long service may continue to accrue for the period to which the payment relates. The employer should check with the ATO and the administrative body of the award that the employee falls under, if this is applicable. If so, then before using any termination long service leave pay rates, put the ETP pay rate(s) in first, so as to ensure that the long service leave balance (up the top right of pay envelope) is updated. See Payments in Lieu of Notice (below).
Bona Fide Redundancy Payment
A certain amount of this payment will be tax exempt. For the financial year ending June 2004 this amount is $5882 plus $2941 for every completed year of service. These thresholds are indexed each year by the ATO. For the latest figure please follow the instructions below.
1. From the main screen of e-PayDay® click on the word 'Tax' and a menu will drop down
2. Select 'Other' and a tax scale window will appear
eg. If the employee had been employed for 5 years then upto $20587 (= $5882 + ($2941 * 5)) of any bona fide redundancy payment would be tax exempt. Any amount above this will br classed as a Eligible Termination Payment (ETP). The pay rates to use are below:
Upto tax free amount: No.16 Termination Redundancy Screen Capture
Above tax free amount: No. 24 Eligible Termination Pay Screen Capture
If any of these pay rates are not in your list of pay types, then set them up as per the screen capture.
Approved Early Retirement Payment
This type of payment is treated the same way as a bona fide redundancy payment, above.
Since the 30th of June 1994 a certain portion of any invailidity payment is isolated for tax purposes. It is called the post-June 1994 invaidity component and it is calculated using the following formula:
(A * B) divided by C where
A is the amount of severence payment above the payout of entitlements
B is the number of whole days in the period from the day of termination of employment to the usual retirement date had the employee continued in employment
C is the number of whole days from the start of the eligible service period (usually regarded as the date the employee commenced employment) to the usual retirement date
of 65 years of age where a usual retirement date is not prescribed for the industry
The appropriate pay rate for this amount is not one of the default pay rates in e-PayDay® it will need to be set up. This link provides a screen capture to assist you in this.
The remaining amount is to be divided into pre- and post- 1 July 1983 components based on period of service. They are both eligible termination payments (ETP) and each will need their own pay rate....
Pre 1 July 1993 component - Screen Capture
Post 1 July 1993 component - Screen Capture
Ex Gratia Payments or Golden Handshakes
An ex gratia payment is taxed in the same way as a bona fide redundancy or approved early retirement payment. If the payment is made in addition to a bona fide redundancy or approved early retirement payment then the two are are added together, then the tax free threshold applied.
Scenario 1 - Payments in lieu of notice that are received in addition to ordinary entitlements because of the redundancy or approved early retirement are treated the same as bona fide redundancy and they are added together for the purposes of working out the tax free component.
Scenario 2 - If the payment in lieu of notice would have been received irrespective of the reason for terminating, then the payment is treated as an ETP.
See Eligible Termination Payments (ETP).
Scenario 3 - Payments in lieu of notice on invalidity are included as part of the invalidity payment (see above), irrespective of whether the individual would have been entitled to the payment had they voluntarily left.
It is possible that where a payment in lieu of notice is made, annual leave and long service leave entitlements may continue to accrue for the period to which the payment relates. The employer should check with the ATO and the administrative body of the award that the employee falls under, if this applicable. If so, then before using any ETP pay rates, edit the pay type and make sure there is a tick next to these accruals at the bottom of the window.
Pay Out of any Unused Sick Leave
Scenario 1 - Payments in relation to sick leave entitlements that are received in addition to ordinary entitlements because of the redundancy or approved early retirement are treated the same as bona fide redundancy and they are added together for the purposes of working out the tax free component.
Scenario 2 - If the payment in relation to sick leave would have been received irrespective of the reason for terminating, then the payment is treated as an ETP.
See Eligible Termination Payments (ETP).
Scenario 3 - Sick leave paid on invalidity is included as part of the invalidity payment (see above), irrespective of whether the individual would have been entitled to the payment had they voluntarily left.
Pay Out of any Unused Rostered Days Off (RDO's)
Payments on termination for unused rostered days off are eligible termination payments (ETP's). See Eligible Termination Payments (ETP).