An employment termination payment (ETP) is a lump sum payment made to an employee because their employment has finished.
ETPs include payments for unused rostered days off, payments in lieu of notice, a gratuity or 'golden handshake', and more. For a full list of payments that are ETPs, visit the ATO website.
And because you'll be reporting your ETPs to the ATO via STP, all you need to do is set up your ETP pay items and do a pay run. Easy!
Rules, tax and other final pay headaches
Final pays can get complicated and they have specific rules and tax treatment. And no two final pays are the same. So we recommend you speak to an accounting advisor about the specifics of your final pay. They'll clarify what needs to be paid and ensure you stay in the good books with the ATO. You can also invite your accountant into your MYOB business so you can work on your books together.
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.
1. Set up ETP pay items
Before processing your first ETP, you need to set up ETP pay items. You'll assign these pay items to the employee who's leaving, but you can re-use them any time you pay an ETP. Tell me more about pay items.
ETPs can be made up of taxable and non-taxable pay items, and tax-withheld deductions. We'll step you through how to create all 3 pay items below, but you may not use all 3 for each ETP you pay. Please see the ATO website or speak to your accounting advisor if you're unsure what a terminated employee is owed.
Creating the ETP taxable earning
Go to the Payroll menu and choose Pay items.
On the Wages and salary tab, click Create wage pay item.
Enter a Name. We recommend naming it ETP - Taxable or similar to easily find it in your pay item lists and identify it on the pay slips.
For the ATO reporting category, choose ETP taxable component.
For the Pay basis, select Hourly. You'll do this regardless of an employee's pay basis.
For the Pay rate, choose Fixed hourly rate of and leave 0.0000 in the next field. You can change the amount when you process an ETP pay run.
Under Allocated employees, choose the employee being paid the ETP.
Click Save.
Creating the ETP non-taxable earning
Go to the Payroll menu and choose Pay items.
On the Wages and salary tab, click Create wage pay item.
Enter a Name. We recommend naming it ETP - Non Taxable or similar to easily find it in your pay item lists and identify it on the pay slips.
For the ATO reporting category, choose ETP tax-free component.
For the Pay basis, select Hourly. You'll do this regardless of an employee's pay basis.
For the Pay rate, choose Fixed hourly rate of and leave 0.0000 in the next field. You can change the amount when you process an ETP pay run.
Under Allocated employees, choose the employee being paid the ETP.
Under Exemptions, select PAYG Withholding to ensure no tax is calculated on this new pay item.
Click Save.
Create the ETP tax-withheld deduction
Go to the Payroll menu and choose Pay items.
Click the Deductions tab.
Click Create deduction pay item.
Enter a Name. We recommend naming it ETP - Tax withheld or similar to easily find it in your earnings lists and identify it on the pay slips.
For the ATO reporting category, choose ETP - tax withholding.
Ensure the Linked Payable Account has the applicable account specified. You can leave all other values at their default.
Under Allocated employees, choose the employee being paid the ETP.
Under Exemptions, ensure PAYG Withholding is NOT listed. If it is, click the delete X icon to remove it. This ensures it's an after tax deduction which doesn't reduce the calculated PAYG.
Click Save.
Superannuation on ETPs
Generally ETPs don't attract superannuation, but this will depend on the ETP you're paying. To get clarification, check with your accounting advisor or speak to the ATO. Here's some ATO information that might help.
If an ETP does not attract superannuation, you'll need to prevent super from calculating on the ETP pay items you've just created.
To prevent super calculating on an ETP
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Go to the Payroll menu and choose Pay items.
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Click the Superannuation tab.
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Click to open the superannuation pay item to be excluded from the ETP, for example Superannuation Guarantee.
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Under Exemptions, click Add exemption and choose the ETP taxable pay item.
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Click Add exemption again and choose the ETP non-taxable pay item.
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Click Save.
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Repeat for any other superannuation pay items to be excluded from the ETP.
2. Process an ETP pay run
After you've set up your ETP pay items and assigned them to the terminated employees, you're ready process the ETP pay run.
Start a new pay run. Need a refresher?
Select the employee being paid the ETP.
Click an employee to open their pay details.
For any non-ETP earnings or deductions, enter 0 in the Hours or Amount column. This is because you should only pay ETPs in this pay run.
Enter required amounts against the applicable ETP pay items.
Click the Select ETP code button.
The Employment termination payment benefit (ETP) code page appears.Select a Benefit type from the dropdown list and choose a Benefit code. If unsure, check with your accounting advisor or the ATO.
Clear all other hours and amounts from the pay. This ensures only the ETP amounts are paid and no super or leave is accrued on this pay.
When you're finished, click Save.
Click Next.
Review the pay cycle, pay dates and the total net pay. When you're ready, click Record.
When prompted to send your payroll information to the ATO, enter your details and click Send.
Email or print pay slips. Need to change an employee's pay slip delivery method?
On the Email pay slips tab, select the employees requiring their pay slips to be emailed then click Email.
On the Print pay slips tab, click the document icon to display the employee's pay slip in a new window. You can now save or print the pay slip.
Click Next.
Finally, you can click Pay employees via bank file to create a bank file to pay the ETP directly into your employee's bank account.
When you're done, click Close.
What next?
If you haven't already, you'll need to pay the employee their final regular pay out any applicable leave. You'll also need to advise the ATO of the termination.
For all the details see Processing a final pay.