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Tax & Super Obligations to Employees

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If you're thinking of hiring a worker, it's important to understand your tax and super obligations.

There are many things to consider when you employ people in your business, and if you are a first-time employer this can be a daunting task both before and after you get employees on board. When you take on staff you have an important responsibility as an employer to treat your staff well and be on top of all employer requirements, particularly where tax and super are involved.

First Time Employers – What You Need to Do

Before you hire your first employee, you will need to ensure you have the correct registrations attached to your Australian Business Number (ABN). This may include:

When you have the required registrations to enable you to employ employees, it is time to start the hiring process. The Fair Work Ombudsman website is a great place to review pay rates, general employer obligations and record keeping requirements.

Another useful free resource is the Employer Advisory Service for small business employers (less than 15 staff) with free tailored advice to assist small businesses in meeting their obligations.

Employer Obligations

When your business is officially employing staff, you need to ensure you are meeting your tax and super obligations which may include:

  • Pay As You Go Withholding – PAYGW refers to the process of withholding a proportion of a payment as tax – specifically withholding from employee gross wages. It is mandatory to have each employee complete a Tax File Number Declaration form upon commencement of employment. This will determine your withholding obligation for each employee. PAYGW withheld from employees must be reported and paid to the ATO in your monthly or quarterly activity statements. A credit for amounts withheld will be available within the employee’s tax return to offset the taxes payable on their wages.
  • Superannuation Guarantee – refers to the compulsory superannuation contributions that employers are obligated to pay on behalf of their employees. The current superannuation guarantee rate is 11% of your employees’ ordinary times earnings (OTE). Employers are required to make superannuation contributions to their employees’ superannuation funds at least quarterly and failure to comply with your obligations can lead to penalties being imposed by the ATO, including general interest charges, administrative penalties and Director Penalty Notices.
  • Fringe Benefits Tax – FBT is a tax payable by employers who provide employees with non-cash benefits that are outside their normal salary and superannuation. If fringe benefits are provided to the employee, the employer must value the benefits in accordance with the legislation and pay FBT at the rate of 47%. You need to register for FBT once you start providing the non-cash benefits and will need to lodge a Fringe Benefit Tax Return annually for the business.

When an Employee Leaves

When an employee leaves you need to arrange their final pay. This can be a simple process but more often than not its complex. The final payment depends on the circumstances of the termination, the industry, the modern award or registered agreement, age and other factors.

A termination payment can be made up of several elements:
  • Final ordinary hours
  • Unused annual leave, loading and long service leave
  • Redundancy payment
  • Pay in lieu of notice
  • Unused rostered days off
  • Superannuation
  • Ex gratia payment
  • Other payments made in case of death, invalidity, or compensation or as required by certain awards.

These payments may be taxed and reported differently to your employees usual wages. Some payments are taxed at marginal rates and others at a flat rate. Special codes must be included in some termination pays to notify the ATO of payment types. For some payments, there are thresholds that must be observed that will affect the termination payment’s tax rates and taxable amount. The taxation of termination payments can be found here.

Once an employee has received their final pay, you’ll also need to report the employee’s termination to the ATO through your STP reporting. 

Fair Work has a great section of their website dedicated to the ending of employment – providing more specifics on the rules around ending When an employee employment, required notice periods, redundancy and final pay.

One of the most common payroll errors is incorrect processing of termination payments when employees leave. Fixing these errors can be costly and time-consuming, not to mention problematic for the employee if categories or taxes are incorrect. This is why we highly recommend businesses refer to Balanced Beans who are specialists in employee onboarding and all payroll processing including termination payments.

Balanced Beans can assist with tax and super-related payroll queries.

We are Newcastle Accountants and Bookkeepers who service all over Australia and are always ready to assist business owners in this important area of your business! 

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