The Termination Transaction in the New Zealand database allows users to select the Leave Types and Rates in the termination.
Termination payments are considered “Extra pays”. And the payment is taxed as a Lump Sum Payment. Holiday Pay can be paid as a Lump Sum Payment at the end of an employee's employment. Refer to the IRD link below for more details:
Lump sum payments are taxed at four different rates and include the ACC Levy. The ACC Levy does not apply to payments for Redundancy or Retirement, Employee Share Scheme, and payments over the ACC maximum. Review the IRD link following for more information:
New Zealand Tax on Termination
For employees attached to a primary tax code (M, ME, M SL, or ME SL), the tax rate is based on their Annual Income. To estimate the annual income, the below are added together:
Annual Earnings - the annualised grossed-up value is based on the terminated employee's PAYE income for their last two paid pay periods before the termination being paid. This appears as Annual Earnings on the Termination screen.
This is a change included in MicrOpay version 9.4 and is in line with the requirements by the New Zealand IRD, effective from 1 April 2025.
Previously, the annualised amount was based on the employee's PAYE income received over the last four weeks. This is the method that will continue to be used for tax calculation of extra pay that is not related to or paid at termination.
Termination Component Amounts - including Leave and Lump Sum payments
Note: Annual Earnings may be blank if the termination is processed in the first pay of the new financial year or if the employee wasn't included in the last period processed for the frequency, e.g. if the last pay processed was an adjustment pay run. You will need to calculate and enter the Annual Earnings. To calculate the value, multiply the employee's last 2 pays by half the number of periods in a year e.g. by 6 if the employee is paid monthly. For more information on calculating the Annual Earnings, see Calculate PAYE for a lump sum payment at end of employment
The termination is taxed at a flat rate based on the income. You can review the rates in Payroll, Maintenance, Tax, Tax Parameters. The ACC earners' levy is added to the tax rate up to the maximum threshold of $142,283 (for the 2024/2025 tax year).
ACC Levy isn't included when the termination reason is Retirement or Redundancy. If you have created a custom Termination reason for Retirement or Redundancy, then you will need to review the tax rates. Refer to the New Zealand IRD link below for more information on calculating PAYE:
To include Leave in a New Zealand Termination
When processing a termination, the included Leave types are selected in Leave Parameters:
Go to Payroll, Maintenance, Leave, Leave Parameters.
Select the Termination Options tab.
Select Payout Leave Types to include leave types in a Termination.
Tick Use Percentage Gross for Annual Leave to pay out a percentage of the Gross as Term Annual Leave Prorata.
Enter the Annual Leave Percentage as the percentage determined by the IRD.
Click OK to save.
Termination Annual Leave is paid out as Term AL Gross and Term Annual Leave Prorata.
Term AL Gross is the entitlement as at the last anniversary, less any leave taken since then. This may be negative if the leave taken is greater than the entitlement.
Term Annual Leave Prorata is not based on the employee's prorata hours. The value is 8% of gross earnings since the employee's last entitlement date. This will include any transactions in the current period and the Term AL Gross. If employment ends within 12 months (before the entitlement date), the employee will only receive this payment.
Refer to the Employment New Zealand website for more information: https://www.employment.govt.nz/ending-employment/
The components included in the Term Annual Leave Prorata are set up in Transaction Totals. To view the components:
Go to Common, Maintenance, Calculations, Transaction Totals.
Edit the record with code STXXTS0002.
Review the Pay Components, Additions / Deductions, Leave Reasons and User Defined Leave tabs.
New Zealand Public Holidays
Sometimes employees are entitled to be paid for public holidays that fall after their employment has ended (i.e., after their termination date). This can happen if the employee has unused annual holidays at the time their employment ends. This rule does not apply to employees who have not completed 12 months' service because they have not become entitled to annual holidays yet.
Accumulated Public Holiday/Alternate holiday leave should be set up to pay out as a Public Holiday on Termination, so you can use the Average Daily Pay rate. This is applied in Maintenance, Leave, User Defined Leave, Termination/Pay Advice Rules Tab.
To Process a New Zealand Termination
The information from the Termination transaction updates the Termination Details on the employee record.
A Termination transaction should be the LAST transaction entered for an employee in a pay period. This ensures that the transactions are taken into account when the system calculates the Termination pay.
Leave paid out on Termination is included in Termination Components, and the Rate Type will default to Normal. You will need to change the Rate Type to the applicable rate, e.g., Holiday Pay Rate.
Go to Payroll, Transactions, Processing, Terminations.
Select the Employee.
Enter the Termination Date and Termination Reason.
If you are paying the employee manually, i.e., not through a bank file, untick Generate Payment.
Tick Bypass Bank Splits if the payment is to be made to the employee's primary bank account.
Change the Annual Earnings, if necessary. This is used in conjunction with the Termination to determine the tax rate.
Tax Rate will default to Auto; you can change this if needed.
Check calculated Termination Leave components included in Termination Components. The Rate Type will be Normal; change this to pay at a different rate, e.g., Holiday Pay Rate.
In Other Components, enter a Term Redundancy/Retirement payment if applicable. If the payment is hours based, enter the number of Hours to calculate the value.
In Total Termination Pay, click on Net Pay, check the allocation of Net Pay, and make any required changes.
A Termination Advice Message can be entered.
In Deds After Tax and Superannuation, check that the Employee and Employer contributions are calculated correctly.
Click Process.