Paid Leave

Paid Leave

Contents

Introduction

The reporting of payments of leave is being broken down for Services Australia (via ATO) to inform the assessment of income tested payments which may be  affected by leave payments received while still employed, or by accrued leave payments and termination payments received upon cessation of employment. 

Additionally, itemising these components of paid leave better informs the ATO on minimum legal obligations for ordinary time earnings (OTE).

Paid leave includes both an absence from work where the entitlement to that absence is remunerated by the payer to the payee, and the payment of the leave entitlement without the absence from the workplace: either in service or upon termination.

Paid leave does not include casual loading that is to compensate the employee for the lack of paid personal or annual leave. Casual loading that is referable to their ordinary hours of work is OTE and therefore reported as Gross, unless paid in respect of overtime hours worked and therefore reported as Overtime.

Reported items

Cash out of leave in service

This represents the YTD amount of ordinary time earnings leave entitlements that have been paid out in lieu of the payee taking the absence from work. This option represents Fair Work entitlements as defined in an award, enterprise agreement or contract of employment (for award and agreement free employees). When leave is cashed out, it reduces the balance of the entitlement, as occurs if the absence was taken, but on the date of payment rather than over the duration of the absence.

Cash out of leave in service may include, but is not limited to, the following types of leave:

All cash out of leave in service is for leave that is classified as ordinary time earnings. If there are other entitlements to leave that are deemed ordinary time earnings, then also report those cash-out payments as Cash out of leave in service. However, if the cash out of leave in service is for leave whose absence is not ordinary time earnings, do not report those payments under this Payment Type. Report them as the applicable Payment Type.

In addition to the leave loading exception referenced above, another example of cash out of leave in service that is not ordinary time earnings is Time Off in Lieu (TOIL). TOIL is provided in some awards and registered agreements to allow an employee to take paid time off work instead of being paid overtime pay. The absence may be granted at the overtime single time equivalent (STE) hours or actual worked hours. An example of the STE method is, if the worker would have worked 2 hours at time and a half, this would equate to 3 STE hours. The absence entitlement of 3 hours, if not taken within the specified time permitted under the industrial instrument, would be paid out as the original overtime penalty hours: 2 hours at time and a half. This type of cash out of "leave" is not ordinary time earnings, therefore not Cash out in service, but instead, should be reported as Overtime.

Withholding for cash out of leave in service is in accordance with NAT 3348 Tax table for back payments, commissions, bonuses and similar payments so should be marked as Tax as bonus.

Unused leave on termination

Some types of leave balances are paid out upon the termination of employment, in accordance with the industrial instruments that define the entitlement to leave. Of the leave balances paid out upon termination, some are considered part of the:

  • Lump Sums – reported as payment type Lump Sum Payment Amount
  • Employment Termination Payment (ETP) – reported as payment type in the Termination Payments Amount

Unused leave on termination is comprised of the post-17 August 1993 component of annual leave, leave loading and long service leave for termination reasons other than genuine redundancy, invalidity or early retirement scheme.

The types of leave balances that are ordinary time earnings when the absence is taken are not ordinary time earnings when paid out on termination. The unused leave paid on termination is comprised of the post-17 August 1993 component of the following leave types, only for normal terminations (other than for genuine redundancy, invalidity or early retirement schemes):

  • Annual Leave – holiday or recreation leave for full time and part time workers.
  • Leave Loading - a bonus payment, usually a percentage of the leave balance.
  • Long Service Leave - granted to reward a specified period of continuous employment for full time, part time and casual workers.

The other accrual-date components of these leave types are paid and reported as Lump Sum Payments.

Previously, in STP Phase 1 and Payment Summaries, the post-17 August 1993 component of leave paid on termination was reported as Gross and marginally taxed, but not OTE and not included in the calculation of the superannuation liability. The tax treatment has not changed, but the reporting of these amounts is now discretely identified as Unused leave on termination and is not ordinary time earnings.

After at least 12 months of service, employees can get parental leave, paid or unpaid, when an employee gives birth, an employee’s spouse or de facto partner gives birth or an employee adopts a child under 16 years of age. Some employers offer paid parental leave and the Government Paid Parental Leave (GPPL) Scheme offers eligible employees, who are the primary carer of a newborn or adopted child, up to 18 weeks’ leave, paid at the national minimum wage. Generally, GPPL is paid by Services Australia to the employer to pay the employee, but both types of paid parental leave may be paid at the same time.

Paid parental leave from the employer and GPPL must be reported as Paid Parental Leave. Use Pay Element PPL for this in CloudPayroll.

If bonuses are paid as an inducement for an employee to return to work after a parental leave absence, that bonus must not be reported as Paid Parental Leave, but must be reported as Bonuses and Commissions, even if the purpose for the payment is due to parental leave.

Tax treatment for the paid absences are as per standard tax tables for salary and wages or lump sums in arrears, depending on the payment frequency. Paid parental leave is not ordinary time earnings or salary or wages for superannuation guarantee purposes.

Workers’ Compensation

Any workers’ compensation payments received by an injured employee for the hours not worked (or not attending work as required) or if the employment has been terminated.

The initial period of workers’ compensation absence and any remaining paid approved workers’ compensation absence paid by the employer to the employee, even if on behalf of the insurer, is not ordinary time earnings (and not salary or wages) and must be reported as Workers’ Compensation.

Because the insurer pays the workers’ compensation absence at a rate typically lower than the current normal pay, many employees request a “top-up” or “make-up” payment from their employer, to achieve their normal pay amount, by accessing other entitlements. Some awards have entitlements to accident pay for employees on workers’ compensation. Accident pay is the difference between what an employee would normally get paid and the amount they get paid from workers’ compensation. These approved workers’ compensation absence amounts are not ordinary time earnings (and not salary or wages) and should also be reported as Workers’ Compensation.

Workers’ compensation payments may be required to continue to be paid, even after the employee is terminated, in accordance with insurer requirements. The workers’ compensation payment to terminated employees may continue for many years. Although no longer technically an employee absence, these payments should be reported as Workers’ Compensation.

Workers’ compensation payments where the employee is required to work is salary or wages for superannuation guarantee purposes and must not be reported as Workers’ Compensation but should be reported as Gross (Ordinary Time) as this is an attendance type, not an absence type.

Tax treatment for the paid absences are as per standard tax tables for salary and wages or lump sums in arrears, depending on the payment frequency.

Ancillary and Defence Leave

Paid leave for absences such as for Australian Defence Force, Emergency Leave, eligible Community Service and Jury Service.

There are a range of leave types that are collectively referenced as “ancillary” leave for full time, part time and casual workers:

  • Community service leave – such as for voluntary emergency management activities for bodies such as the State Emergency Service, Country Fire Authority and the RSPCA.
  • Jury duty leave – including attendance for jury selection. Full time and part time employees have to be paid “make-up pay” for the first 10 days of jury selection and jury duty.

Defence reserve leave applies to volunteers of the Australian Defence Forces to undertake defence services. Employers may access financial assistance to offset the costs of releasing employees for Defence service through the Employer Support Payment Scheme.

Employers may offer paid or unpaid absences for all these types of leave. All paid absences, including "make-up pay"” for ancillary and defence leave are to be reported as Ancillary and Defence Leave. These types of absences are not ordinary time earnings or salary or wages for superannuation guarantee purposes.

Any other types of paid absences that are not OTE are to be reported under this category.

Tax treatment for the paid absences are as per standard tax tables for salary and wages or lump sums in arrears, depending on the payment frequency.

Other Paid Leave

All other paid absences, regardless of rate of pay (full, half, reduced rate) are ordinary time earnings and must be reported as this payment type. It includes, but is not limited to:

  • Annual Leave – holiday or recreation leave for full time and part time workers.
  • Leave Loading – a bonus payment, usually a percentage of the leave balance. However, if the loading is demonstrably referable to a notional loss of opportunity to work overtime, payment of that leave loading would be classified as Overtime, rather than as Other Paid Leave.
  • Long Service Leave – granted to reward a specified period of continuous employment for full time, part time and casual workers.
  • Personal Leave – granted for sickness, injury or to care for an immediate family or household member who is sick or injured, or to help during a family emergency for full time and part time workers.
  • Rostered Day Off (RDO) – a paid entitlement to absence, accrued due to additional ordinary time hours worked in a roster period, that an employee doesn’t have to work. Note that some RDOs are set out in an award or registered agreement to be unpaid.
  • Time Off In Lieu (TOIL) – a paid absence, provided in some awards and registered agreements, to allow an employee to take paid time off work during the ordinary span of hours at their ordinary rate of pay (not penalty rates) instead of being paid overtime pay.
  • Other Leave – any other forms of paid leave that are not identified above that represent ordinary time earnings, including, but not limited to:
    • Compassionate and bereavement leave – full time and part time employees receive paid compassionate leave
    • Study leave – some employers may provide payment for study and exams, such as per the MA000079 Architects Award 2020 S13.6 award.
    • Family and domestic violence leave – some employers may provide payment for this entitlement.
    • Special Paid Leave – some employers may respond to specific social, health, legal or economic circumstances by offering paid leave. For example, indefinite paid leave during an investigation of an employment matter (“gardening” leave) or special paid leave during COVID-19.

If an employee and employer have agreed to flexible working arrangements, where the ordinary hours of work are varied, the additional ordinary hours worked to accumulate flexible time off during otherwise ordinary hours of work may be recorded in the timesheet, but not defined as a paid absence during ordinary hours of work. This is due to the variation of the ordinary hours of work to accommodate the flexible working arrangements. Those types of unworked hours are not “paid absences”: that would require absence during the ordinary hours of work, that this category of Paid Leave is designed to capture. The flexible working arrangement payment would be part of the normal salary and wages that would be reported as Gross (Ordinary Time).

Tax treatment for the paid absences are as per standard tax tables for salary and wages or lump sums in arrears, depending on the payment frequency.

Set up in CloudPayroll

  1. Go to Setup > Pay Elements
  2. Go to Leave
  3. Go to Add > Add Leave Taken
  4. Complete the fields

Basic Details

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  • Leave Taken Code: The Leave Code appears in the drop-down list when you add transactions to a timesheet. You should use a short, easy to type, code that you can remember easily. (If you are used to another payroll system that has Leave codes or numbers, you may like to use those for your leave code).
  • Description: Enter a description that will clearly describe to a person what this leave is for. This is displayed on the person's timesheets and payslips.
Note: If you include %rate% in your description, it will be replaced by the transaction's rate on the person's payslip.
  • Multiplier: Generally you will enter 1.0. The amount calculated is multiplied by this multiplier, and it will be 1.0 for most leave.

Leave Type

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Cash out of leave in service setup

  • Liable Earnings:
  • Payable on Termination Pay: For cashing out of leave this should be unticked.
  • Cash out in service: For cashing out of leave this should be ticked.
  • Available for Leave Request:
  • Tax Type:

    • Taxable:

    • Tax as bonus: .

Unused Leave on Termination setup

  • Liable Earnings:
  • Payable on Termination Pay:
  • Cash out in service: For this should be unticked.
  • Available for Leave Request: For unused leave on termination this is generally unticked.
  • Tax Type: Select the one that best describes this payment type.

    • Taxable: This should be selected for unused leave on termination.

    • Tax as bonus: This shouldn't be selected for unused leave on termination.

  • Liable Earnings:
    • Accumulates into RDO's Liable Earnings: This will depend on the award or agreement. 
  • Leave Type: Select the relevant leave type.
  • Payable on Termination Pay:
  • Cash out in service: For these leave types this should be unticked.
  • Available for Leave Request: For these leave types (with the exception of Annual, Sick, Long Service, Lieu and RDO leave) this will be unticked.
  • Tax Type: Select the one that best describes this payment type.

    • Taxable: This should be selected for these leave types.

    • Tax as bonus: This shouldn't be selected for these leave types.

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