In the unfortunate event that an employee suffers from a permanent disability and you need to terminate them, special concessions apply to the taxation of the payment.
Part of the payment may be deemed an ETP, but first, several conditions must be satisfied:
The termination of employment is due to the employee’s permanent disability.
The termination of employment is before the date the employee would normally have retired because of age or period of service (early retirement is usually before age 65 or the term of contract).
Two legally qualified medical practitioners must certify that the employee’s disability is likely to prevent the employee from ever being employed in a capacity for which they are reasonably qualified because of their education, training or experience.
The tax free amount of the payment is linked to the employee’s future employment period lost due to the injury, thus resulting in early retirement.
You can work out the invalidity segment of your ETP using the following invalidity formula:
For more information on Invalidity you can refer to the below link from the ATO:
For the ATO's worksheet on calculate the ETP Amount refer to the link below:
Entering a Termination due to Invalidity
A Termination transaction must always be the LAST transaction entered for an employee in a pay period. This is to ensure that any leave components included in other transactions are taken into account when the system calculates the employee's leave balances in the Termination pay.
Go to Payroll, Transactions, Processing, Terminations.
Select the Employee.
Enter the Termination Date.
Select Invalidity as the Termination Reason.
You will be asked to confirm whether all the termination payment relates to the current financial year. Click Yes if all payments relate to the current financial year, otherwise click No. The answer to this question determines how the ETPs are categorised.
The STP Cessation Reason should default to Ill Health.
If the employee will not be paid their Termination Payment by EFT, untick the Generate Payment checkbox.
Select the Bypass Bank Splits checkbox if the entire payment is to be transferred into the employee's primary bank account.
Enter the date the employee would have retired in Retirement Date. This could be their 65th Birthday or another date.
Check the Pre July 1983 days of service, Post June 1983 days of service, Total Days Employed and Total Years Employed values automatically calculated.
Check that the Average Normal Gross is correct. This value is used to calculate the employee's marginal rate of tax. This value may need to be amended if required.
MicrOpay automatically updates the employee's leave entitlements to the end of the Termination Date. Check the Termination Leave components and their corresponding Tax values.
In the Termination Pay Summary section, click on Total ETP Components.
Enter the Invalidity payment. Based on the Retirement Date and the Total Days Employed, MicrOpay will calculate what portion of the Invalidity payment is tax free using the formula above and calculate the tax on the taxable portion. You can check these calculations by referring to the ATO links above.
Enter any other termination payments that are owed to the employee.
Click Process to save the transaction.