How do the tax settings in Application Settings affect employee tax calculations?

Tax Settings - Application Settings

NB The settings are for dividends only.

Firstly, navigate to the tax settings:

1. Click Manage Application Settings from the main menu
2. click the Tax Settings tab

The tax settings display.

The system default settings are displayed above.

There are differing opinions on how to treat employee tax and the way tax is calculated may depend upon the circumstances of the termination, award conditions and the employment contracts. It is important for clients to formulate their own view with respect to how tax should be calculated and then use the system appropriately to achieve their own objectives.

Clients need to ensure they have received advice with respect to how they terminate employees, understand the resultant tax treatments that arise from these actions and circumstances and then how to correctly configure the system to apply the desired result.

Payments for wages in Lieu of notice

Not to be treated as ETP

Tax Setting

Employees Claim

The tax affect will show in the Tax Summary Info tab:

To be treated as ETP

Tax Settings

Same employee claim

The tax affect will show in the Tax Summary Info tab:

By entering PILN as wages then the PILN component has the same priority as normal wages and superannuation (s566). If there is a part dividend to employees then this claim will be given priority ahead of other claims such as redundancy.

In general terms, the argument for including PILN as wages revolves around the assertion that the claim arising relates to time that would have been worked by an employee and ordinarily the employee would have been paid as gross pay and paid tax on the income considered normal wages. To change the claim from wages to redundancy changes the nature of the debt owed to the employee. Frequently, case law is cited in support of this position. If the employee was made redundant, given notice, and then afforded the anticipated process of working out their notice period then the PILN amount would have been paid as wages. I.e. the claim represents wages that were not worked.

The other argument is to treat PILN as a redundancy payment as relates to the fact that the claim only arose from the event of the company's insolvency and the resultant redundancy.  There are also specific references within ATO literature that refer to PILN as redundancy payments. This is the default setting out of the box.

Also see the Auto system tax calculations

Include Retrenchment in lieu of notice in Retrenchment Tax Free Component

Tax Setting

Amounts entered in the RILN part of the employee claim.

Will be included in the Genuine Tax Free Component when calculating the tax on retrenchment payments. In the example below the setting is off:

Note

You will see an exclamation mark when you haven't entered the commencement date.

More on Redundancy payments can be found in this article.

Report payments for annual and long service leave as Lump Sum A

Selecting this option will treat payments for Annual Leave and Long Service Leave as Lump Sum A.

The claim

Tax Calculation info:

The exclamation mark denotes the system application setting for Lump Sum A

The tax affect will show in the Tax Summary Info tab:

More on Lump Sum A can be found in this article

Automatically deduct Superannuation from Retrenchment in Lieu of Notice payments.

For a detailed explanation of this setting please refer to a separate article by clicking here