Some companies allow their Employees to purchase additional leave.
For example, the employee purchases an additional four weeks' annual leave, which gives them eight weeks' leave. Rather than paying up front for the additional leave or taking unpaid leave, Purchased Leave allows staff to spread the cost of the additional leave over 52 weeks.
The following steps are based on the Purchased Leave example below. Your setup may differ to meet your Company policy.
Marie is a full-time employee who currently earns $60,000 per annum based on a 37.5 hour working week. She has been approved to receive an extra four weeks of purchased leave, so Marie will now have a total of eight weeks' annual leave for the 52 week period of operation.
We recommend setting it up as follows.
There are four steps to setting up Purchased Leave:
Set up User Defined Leave and Leave Reason to accrue and pay the Purchased Leave.
Deduction to reduce the Gross by the cost of the Purchased Leave.
Employer Super Contribution will need to be considered.
Attach the new leave and deduction to the employee.
As part of the setup, you will need to select the STP Reporting Group and Subgroup for the Leave Reason and Deduction. Refer to the ATO link below for more information on which group to select:
User Defined Leave and Leave Reason for Purchased Leave
It is recommended to set up Purchased Leave as User Defined Leave, and to enter the maximum entitlement, which is the amount of leave the employee has agreed to purchase. Our example is an Entitlement Accrual Type for a maximum of 4 Weeks.
Set up User Defined Leave:
Go to Payroll, Maintenance, Leave, User Defined Leave.
Enter a Code and Description.
Select the Method. This is how the leave will accrue. In our example, this is Entitlement Accrual; however, select the method that suits your company policy.
Select the Leave Reason. If there is no existing Leave Reason:
Right-click in Leave Reason and select Add New.
This will open the Leave Reason screen. Enter a Code and Description.
Complete any other required fields.
Click the STP Reporting tab.
Select the STP Reporting Group and STP Reporting Subgroup.
If applicable, tick Ordinary Time Earnings (OTE).
Click OK. This will add the Leave Reason to the User Defined Leave.
Enter the Entitlement: Maximum Each Period as the amount of leave an employee accrues in the period. In our example, this is 4 weeks per 1 year.
Complete any other required fields.
Click the Termination/Pay Advice Rule tab.
Select what happens to the leave balance on Termination.
Select the Include on Pay Advice option and (if applicable) enter a Balance Description.
Click OK.
When you produce the Pay Advice (Payroll, Reports, Transactions), check the Leave Tab to ensure that you have chosen how you want the Purchased Leave to display on the Pay Advice. If Total is ticked, you will see the balance of Purchased Leave on the Pay Advice.
Deduction code for Purchased Leave
Set up a Deduction before tax to recover the cost of the Purchased Leave.
To do this:
Go to Payroll, Maintenance, General, Additions and Deductions.
Enter a Code, Shortcut Key, and Description.
Select Deduction before Tax as the Category and Amount as the Type.
Tick Reducing Balance if there is a maximum that needs to be recovered. This will stop deduction when the total value of the Purchased Leave has been recovered.
If required, tick Include in EarlyPay. This field is available where EarlyPay is enabled for the database. Ticking this will reduce the accrued earnings available in EarlyPay, ensuring that the employee has enough to cover their obligations.
Complete any other required fields.
Click the STP Reporting tab.
Select the Reporting Group and Subgroup in STP Phase 2.
Tick Ordinary Time Earnings (OTE) if applicable.
Click OK.
Employer Super Contribution for Purchased Leave
So that the Superannuation will calculate correctly, go to Payroll, Maintenance, Superannuation, Employer Contribution, and edit the Superannuation Contribution(s). Select the Deduction before tax code that has been set up for Purchased Leave. If you have All Deductions Before Tax already ticked, you do not need to select the code as well.
Add User Defined Leave in Pay Components if you haven’t done so already, and select the new User Defined leave class in the User Defined Leave Class tab.
Employee setup for Purchased Leave
To add Purchased Leave to the employee record:
Go to Payroll, Maintenance, Employees, Employees.
Edit the employee.
The Rate Details should remain to show the Full Time Salary, for reporting purposes.
Select Additions & Deductions.
Click Add and select the Purchased Leave deduction.
Untick Default.
Enter the Amount per Pay. If the deduction is set up as Reducing Balance, enter the total amount of the Purchased Leave in Reducing Balance.
Click OK.
Select Leave.
Click Add and select the Purchased Leave.
Change the Entitlement and Prorata Dates to the date you want to commence accruing the leave.
Click OK and then OK.
To work out the value to use for the Deduction, use the following calculation.
Work out the time fraction; this is 52 weeks minus the number of purchased weeks of leave divided by 52 weeks. In our example, if four weeks of leave is purchased, then the calculation is 48/52 = approx. 92%.
Next, calculate the amount of the Gross, to do this, multiply the yearly salary by the time fraction. For our example, it would be .92 x $60,000 = $55,200. A difference of $4,800 per annum, this is the amount the deduction should come to at the end of the year. Enter this as the Reducing Balance if required
Lastly, divide the Yearly value of the deduction and divide by the number of pay periods in the year. In our example $4800/52 = $92.31. Enter this as the Amount per Pay.
At the end of the year, you should review the Purchased Leave class and the Deduction and determine whether it will apply to the employee again for another 4 weeks of purchased leave in the next year.
How it will look in a transaction
In all periods, the Deduction for the Purchased leave will appear if Standard Additions and Deductions are included. As per our example, there is a Deduction before Tax of $92.31, which reduces the Gross. You will also see that the Employer Superannuation Contribution is calculated on the reduced gross value as well.
When the employee wants to take their Purchased Leave, you choose the User Defined Leave in the transaction and select the Purchased Leave Class and Reason.
Setting up the Purchased leave this way will enable you to see the actual salary at all times, which will assist you when Salary Review information is required. The user defined leave keeps a record of the Purchased leave hours left for the year at any given time. The reducing balance deduction allows you and the employee to see the balance of the deduction throughout the year. A Salary increase may require the Deduction before tax to be reviewed.