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  1. #1
    Join Date
    May 2011
    Location
    Melbourne
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    45

    Default Retiring Employee

    Hi

    We have a part time employee (farm hand) who works 40 hours per fortnight. Due to health reasons he is needing to retire, and at the age of 64 he is ready.

    Instead of recieving on lump payment he has proposed that his annual leave and long service leave be processed per fortnight (at fulltime hrs = 76 hrs) until it has been completely utilised, rather than pay him out in one payment. This would take him to around the beginning of January 2013, which would get him to his retirement age of 65 and therefore qualify for the aged pension.

    Can we do this? I cant find any informaiton that states we cannot.

    Thanks

  2. #2

    Default

    Transition to retirement.....A lot of larger companies have this within enterprise agreements and policy. The key is to check with the super fund, clarify your employers requirements in terms of workers comp/OHS (Your paying him but he's not at work) and get the employee to sign a deed of agreement or deed of separation (everyone calls them something different)....document everything and you should be right.......I have a client that utilises a transition process whereby the employee works 2-3 days per week to mentor the new incumbent, then the superfund pays his wage for the other 2-3 days. Bit of a stuff around but it is possible......

  3. #3
    Join Date
    May 2011
    Location
    Melbourne
    Posts
    45

    Default

    I will definitely get underway with a Deed of Release.

    thank you

  4. #4
    Join Date
    May 2010
    Location
    Melbourne
    Posts
    151

    Default

    The only thing I would check is the relevant state LSL legislation as to whether you can pay the LSL out at the higher rate over a shorter period of time - eg paying 2 weeks pay for 1 week of leave. Some states this falls under the provision of cashing in the LSL which is a no-no.

  5. #5
    Join Date
    Jul 2007
    Location
    Melbourne
    Posts
    40

    Default

    It's a shame you can't make him "redundant" and roll it all up into an ETP

  6. #6
    Join Date
    May 2011
    Location
    Melbourne
    Posts
    45

    Default

    Just had a thought....

    What about payments of Superanuation? Are we obliged to pay super on these payments – we would not have done so if the leave accruals were paid out on termination..

    Any thoughts...

  7. #7
    Join Date
    Feb 2012
    Location
    Melbourne
    Posts
    48

    Default

    Quote Originally Posted by DanB View Post
    Just had a thought....

    What about payments of Superanuation? Are we obliged to pay super on these payments we would not have done so if the leave accruals were paid out on termination..

    Any thoughts...
    That would be one of the reasons he is asking to do this.

    The other would be to reduce the tax that would be payable compared to taking a lump sum.

  8. #8
    Join Date
    May 2010
    Location
    Melbourne
    Posts
    151

    Default

    Quote Originally Posted by DanB View Post
    Just had a thought....

    What about payments of Superanuation? Are we obliged to pay super on these payments we would not have done so if the leave accruals were paid out on termination..

    Any thoughts...
    Hate to say it, but most times when the company tries to be nice like this the company ends up paying more.

    Yes, super will be payable as the leave is being taken instead of being paid out.

    Also take into consideration though that you will need to continue to accrue the leave (both annual and long service leave) while the leave is being taken as well. So when you add in the 9% extra for super, the 7% extra for the annual leave accrued and a few % for the LSL, your looking at costing the company another 20%. (Also your workcover premiums would also be included as extras on this as well so add in whatever the premium rate is)

  9. #9
    Join Date
    Jul 2007
    Location
    Melbourne
    Posts
    40

    Default

    I would look into Eligible Termination Payments and Employment Termination Payments. Unfortunately the ATO seems to call them both ETPs!

  10. #10
    Join Date
    Apr 2012
    Posts
    192

    Default

    If this guy is looking to minimise tax on a lump sum, we are just into a new financial year and if he is not planning to work again in this year, then his income tax (assuming he has no other income stream which will adversely affect his overall tax obligations) will be equalised out come 30th Juen 2013 (that is, tax paid now is generally based on the income being paid over 12 months so he'd probably get a chunk back at the end of this financial year).

    I would recommend to him he get his own tax advice. Alternatively, if he doesn't have a tax advisor, your company might be nice enough to pay for one session with a tax consultant to offer him advice, particularly if he has been a long serving valuable employee - kind of a retirement present if you like.

    Also for what it's worth, I would not go down this route for reasons already mentioned by others. The company is better off making a clean break paying out his LSL and A/L entitlements at time of retirement.

  11. #11
    Join Date
    Jul 2007
    Location
    Canberra
    Posts
    54

    Default

    Dan,

    It seems to me that the payments to your retiring employee could be spread out in one of two ways:

    1. He remains an employee, on paid leave, until his leave runs out. As a paid employee, he would be entitled to employer superannuation payments, the company would have to include his payments as part of your total payroll for the Worker's Comp premium, and so on.
    or

    2. He retires now, and becomes an ex-employee. As a retiring employee, he is entitled to be paid for all of his unused Annual Leave and Long Service Leave. Under the ATO rules, tax instalments have to be deducted according to certain calculations, and the employee should be paid the remainder after tax is deducted. Under normal circumstances, this payment would be paid as a single lump sum. However, at the request of the (former) employee, I can't see any reason why you couldn't agree to deliver that entitlement as a number of smaller payments over a period of time instead of one big payment. There's an administrative workload to do that, but that might be OK if it meets an objective for the company.

    You should make it quite clear to the employee what date he stops being an employee if you adopt option 2, because the employer superannuation payments would cease, and he should make sure that his pension plans won't be stuffed up if he leaves employment at age 64 instead of 65. But the Tax Office would be no worse off, so I'm pretty sure that there's no legal reason why you and your employee can't agree to a "different" way of delivering his standard termination payments to him.

  12. #12
    Join Date
    Feb 2012
    Location
    Melbourne
    Posts
    48

    Default

    Quote Originally Posted by Tiger View Post
    If this guy is looking to minimise tax on a lump sum, we are just into a new financial year and if he is not planning to work again in this year, then his income tax (assuming he has no other income stream which will adversely affect his overall tax obligations) will be equalised out come 30th Juen 2013 (that is, tax paid now is generally based on the income being paid over 12 months so he'd probably get a chunk back at the end of this financial year).
    We know that, Tiger, but he probably doesn't.

    Quote Originally Posted by Tiger View Post
    I would recommend to him he get his own tax advice.
    Sadly, he probably already has. In my experience they are usually the ones who come up with these schemes.

    9 times out of 10, when an employee starts a conversation with, "My tax agent says ..." I just know by the end my response will be "Get another tax agent".

  13. #13
    Join Date
    Feb 2012
    Location
    Melbourne
    Posts
    48

    Default

    Quote Originally Posted by Greg Schmidt View Post
    I can't see any reason why you couldn't agree to deliver that entitlement as a number of smaller payments over a period of time instead of one big payment.
    This wouldn't change the outcome significantly as (most) calculations are still at top marginal rate on the full amount, and wouldn't get the benefit of fortnightly tax-free threshold. As Tiger said, the real benefit only comes when the tax return is assessed.

  14. #14
    Join Date
    Jul 2007
    Location
    Canberra
    Posts
    54

    Default

    Quote Originally Posted by Neb-Maat-Re View Post
    This wouldn't change the outcome significantly as (most) calculations are still at top marginal rate on the full amount, and wouldn't get the benefit of fortnightly tax-free threshold. As Tiger said, the real benefit only comes when the tax return is assessed.
    Agree. The employee wouldn't get any tax benefit from this. I proposed it as a possible solution to the problem of the employee needing to cease active work now (due to health) but wanting to have a regular income stream for some months to come.

    Greg

  15. #15
    Join Date
    May 2010
    Location
    Melbourne
    Posts
    151

    Default

    Is it worth the hassle though to do the calculations, draw up the agreement, have the employee sign it, start the payments, have the employee change their mind, do a new agreement, make the alterations required etc just because the employee can't budget? If he's going to be relying on the pension, he'll need to learn this skill pretty quick.

    The employee is also leaving work due to health reasons. If he gets the money paid out up front and is provided with a seperation certificate, he'll be able to claim some form of benefit from centrelink to tide him over until the pension age. I have a good portion of employees here on workcover claim a benefit via centrelink until their workcover claim is approved when they have no sick leave to tide them over.

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