Cashing out Annual or Long Service Leave means an employee receives payment instead of taking time off work. Annual leave can only be cashed out when an award or registered agreement allows it. For further details, please click on the link:
http://www.fairwork.gov.au/leave/annual-leave/cashing-out-annual-leave
If your company allows employees to cash out their Leave, there are a number of different ways this can be done. The method below allows the user to take advantage of the Bonus Tax function, which will calculate the tax across the year.
Set up an Addition Before Tax in Payroll, Maintenance, General, Addition and Deductions, as an amount type with an appropriate description that will appear on your Employees' Pay Advice and your reports. If you have to cash out Long Service Leave, a second Addition should be set up with a different description for ease of identifying which leave type it is on your reports. The STP Reporting Tab in the Payment Summary field should remain as Include in Gross Salary & Wages. The STP Phase 2 Reporting Group and Reporting Subgroup need to be filled according to the ATO's guide.
Create a Rate Type in Payroll, Maintenance, Rates, Leave Rates that is Fixed and leave the Fixed Rate blank.
Set up a Leave Reason in Payroll, Maintenance, Leave, Leave Reasons with an appropriate leave reason description and attach to the Leave Type and the Rate that was created in the previous step.
You may also need to confirm if you are required to pay Employer Superannuation on the Cashed Out Leave. If you find that you need to pay Employer Superannuation, go to Payroll, Maintenance, Superannuation, Employer Contribution and edit the Contribution. Select the Calculation Parameters tab and then the Addition & Deduction Codes tab.
If you have All Additions Before Tax ticked, then your new addition code will already be included in the Employer Superannuation calculation and there is nothing further to do. If it is not, click Select, highlight your new Addition and select OK to update and then OK to save. You may also need to repeat this process if you have the Salary & Wages tab in your Employer Superannuation Contribution.
When you are ready to process the payment, go to Payroll, Transactions, Processing, Manual Calculation and select the Employee. If you would like this payment processed via EFT, tick Generate Payment. If the payment has already been paid to the employee and you are updating the details, untick Generate Payment.
Select Annual Leave or Long Service Leave and select Add. Select the Reason that you set up in step 3 and enter the hours the employee is cashing out. No Start Date or End Date is required as the employee is not taking the time off. The value remains as 0.00.
Next, select Adds Before Tax, click Add and select the Addition Before Tax code that you set up in Step 1.
Click Bonus Calc in the bottom right.
A screen will pop up. The Average Normal Earnings is based on the Gross Income of the Employee, divided by the Pay Frequency the employee is attached to. In Bonus Amount, enter the gross value of the cashed out leave. The Number of Periods is based on the Pay Frequency attached to the employee. Once you have reviewed these details, select Calculate Tax.
The Tax Withheld value will appear, select OK to save it. Then, Process to complete the transaction.
Note: If you are required to cash out more than one leave type, it is important to note that the Bonus Calc will replace the tax value it calculated the first time with the value of the new leave type. The Tax Withheld figure should be noted for each leave type and then the Tax value manually modified with the total of all the leave components being paid. Alternatively, two transactions could be processed so that the tax calculated using the Bonus Calc feature is for each one.
It is advisable to check if you can cash out Long Service Leave, as some awards do not allow this. This transaction will produce a Pay Advice for the employee with the details. After the End of Pay process, the employee’s records will be updated with the reduced leave balance.
Annual, Long Service and Sick Leave classes based on Hours Worked will still accrue on these hours when they are processed. If you do not want to accrue on these cashed out hours due to company policy, you will need to process a Leave Adjustment to reduce the accrual in the Employee's Leave Details after the transaction has been processed. Please see the article Leave Adjustment for further information.