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3. Create payroll categories for termination payments

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This is task 3 of 7 for processing a final pay (see previous task or an overview of all tasks).

Termination payments are normally taxed at different rates and may not accrue superannuation. Also, different types of payments are reported separately to the ATO. You may need to create several new payroll categories, particularly if the termination is an ETP, to ensure you report payments correctly. What is an ETP?

Rules, tax and other complexities

Final pays can get complicated so we recommend you speak to an accounting advisor about the specifics of your final pay—particularly if the final pay includes an ETP.

To learn about tax on final pays, see this ATO information. For the rules, calculators and other final pay resources, check the Fair Work website.

Payroll categories you might need to set up

  • Unusead leave—If the employee whose leaving has unused annual leave, you'll need to set up a wage category for each type of unused leave you're paying them.

  • ETP tax withheld—If the employee's final pay includes an ETP, you'll need to create a deduction category to track the tax you withhold from their ETP.

  • ETP taxable and ETP tax free—If the employee's final pay includes an ETP, you'll need to create wage categories for the taxable and tax-free components of the payment.

Lump Sum A payments

An unused leave payment might be classified by the ATO as a lump sum A. To clarify this for the final pay you're preparing, check with an accounting advisor or the ATO.

When paying lump sum A amounts, you also need to report the reason for the employee's termination as part of reporting this amount. Terminations can be one of two types, redundancy or termination. A redundancy type includes bona fide redundancy, approved early retirement or invalidity payments. A termination type includes all other termination reasons (such as resignation).

To report the termination payment type, you need to create a termination payroll category for each amount that will be included as part of a Lump Sum Payment A amount. When creating a category, give it a name that identifies the payment type. For example, if you need to create a wage category for unused annual leave pay for a bona fide redundancy payment, use a name such as ‘Unused Annual Leave Pay (R)’, where (R) indicates a redundancy type.

You'll also need to assign the applicable ATO Reporting Category to each Lump Sum Payment A payroll category. If you're not sure what to assign, check with your accounting advisor or the ATO.

Learn more about lump sum payment types.

When you're done, find out how to exclude termination payroll categories from superannuation calculations.