Recording an ETP (Employment Termination Payment) in Payroll / Cashbook Manually

Recording an ETP (Employment Termination Payment) in Payroll / Cashbook Manually

How do I handle Employment Termination Payments (ETP) in Cashbook?

Employment Termination Payments (ETP) is a lump sum payment an employer makes:

• to an employee when their employment is terminated (referred to as a 'Life benefit' ETP)
• to an employee’s estate because their employment has been terminated due to death (referred to as a 'Death benefit' ETP).

ETPs include lump sum payments paid upon resignation, retirement or death. A payment from a super fund is not an ETP.

ETPs include things like gratuities or 'golden handshake', unused roster days off and severance pay, but not payments for accrued annual leave, long service leave or the tax-free part of genuine redundancy payments. Click on the following ATO link for more information on Payments that are ETPs.

Click on the following ATO link for more information on: Taxation of termination payments.

Note: A payment must generally be made within 12 months of termination to qualify as an ETP.
A payment made outside 12 months is a delayed termination payment, unless the ATO has given approval for the payment to be treated as an ETP.

 

• Cashbook doesn’t provide for ETP’s within payroll so they have to be handled manually.

 

Steps to recording an ETP manually in Cashbook :

1.  Create an additional employee record for the employee concerned in payroll, keeping all details the same except for tax scale – set tax scale as 2 initially – Tax Free Threshold Claimed.

• Click on the Payroll toolbar icon.
• Click on the Employees tab.
• Click on Add Employee button.
• Enter the same employee information in the Employee Details tab section.
• Click on the Tax and Super tab.
• Select 02 Tax Free Threshold Claimed  from the Tax Scale drop-down list.
• Add Tax File Number. Ignore Employer Super information - lump sum payments do not attract the super guarantee (SG).
• Click OK to save.

 

2.  Set up Employment Termination Payments as a pay type in Payroll.

• Click on the Payroll toolbar icon.
• Click on the Setup Lists tab.
• Make sure you are in the Pay Rates tab section.
• Click on the Add button.
• Enter information as follows:

 

3.  Record the ETP amount and tax paid as a single payroll entry against this second employee record (you may need to select ‘manual tax’ to set the correct tax amount deducted). Note: Any other final pays or unused leave payments etc. would be recorded against the original employee record.

• Still in Payroll.
• Click on the Employees tab.
• Select the second employee record.
• Click on Add Pay button.
• Click on the Wages/Salary tab.
• Select ETP Payment as Pay Type.
• Enter the gross amount to be paid.
• Click on the following link:  Tax table for employment termination payments (NAT 70980)  to work out how to calculate the Pay As You Go (PAYG) withholding.

For example:  Bill is an employee of a company and is 53 years old. The company paid Bill salary and wages totalling $84,000. Under his employment contract, Bill will receive a 'golden handshake' of $10,000 from the company. This payment is an ETP and has a tax-free component of $2000 (relating to service before July 1983) and the taxable component of $8,000. The company is required to withhold an amount under the PAYG withholding system. Bill is under the preservation age, so the withholding rate is $31.5%. The company withholds $2520 from Bill's ETP of $10,000. This is 31.5% of Bill's taxable component of $8000. (This is a very simplistic example and does not show correct calculations. Please refer to the  Tax table for employment termination payments (NAT 70980)  or ask your accountant how to calculate your specific ETP.)

 

• Click on the Summary tab.
• Tick on the Manual Tax / Super check box.
• Enter the Tax amount manually, (e.g. $2520).
• Click OK to save.

.

• Click Yes to Information message: 'Do you want to add this pay into your cashbook?'
• Click OK to save cashbook transaction.

 

4.  Complete a PAYG payment summary - ETP form. Click on the following link to download the form in PDF format:  AYG payment summary - employment termination payment (NAT 70868).

• Fill out the form in triplicate – one goes to the employee, send one to the  ATO and retain a copy for your (the employer) records.

 

5.  Complete the BAS for the quarter as usual – the ETP gross and tax will be included in the payroll totals as part of the BAS.

 

6.  Create a new tax scale called 79 ETP Payments.

• Click on the Payroll toolbar icon.
• Click on the Tax Scales tab.
• Click on the Add button.
• Enter a new custom tax scale name, e.g. 79 Employment Termination Payment.
• In the Earnings Less Than column enter $100000.
• In the (a) Multiplier column enter 0.00.
• In the (b) Subtract column enter 0.00.
• Click OK to create your new tax scale.

 

7.   After the BAS is completed for that period,  change the tax scale allocated to that employee (in the second record) from 2 to 79 – this will ensure that they do  not  get a normal Payment Summary printed from payroll for the ETP and the details of the ETP are not included on the Electronic file for the ATO (as that is already reported via the ETP copy to ATO).

• Click on the Payroll toolbar icon.
• Select employee (second record with ETP transaction).
• Click on the Tax and Super tab.
• Select the new Tax Scale from the drop down list.
• Click OK to save.

Article ID 1452