Q/ Unfortunately an employee has passed away and we have some payments still owing to them. How should I pay and tax them?
A/ Once you have established who can legally receive and make directions about the payments (which may be some time after the employee has passed away), then make the payments in the following way:
Salary and Wages and Bonuses earned by the employee but not yet paid at the time of passing:
Are not taxed and do not appear on a payment summary. You will provide a letter with the payment giving a breakup of the payment.
You should discuss with your payroll system provider how to set this up correctly in your system.
Note these payments ARE Payroll Taxable – so they need to be included in your payroll system and not just sent by accounts payable to ensure you correctly complete your payroll tax return
Note also that these payments ARE Superable. You should check with the employee’s super fund to see if they will still accept your contributions before trying to send them. If not, the super amount can also be paid to the person/trustee receiving the employee’s wages. This will still meet your SG obligations.
Unused Annual and Long Service Leave
As with salary and wages above, these payments are not taxed and do not appear on a payment summary. Again you will provide a letter about the payment. They are payroll taxable but not superable. You should check how to set this up in payroll with your system provider.
Other payments made after an employee passes away, such as unused RDOs, Unused sick leave, etc are Employment Termination Payments – just as they would have been if they had been paid had the employee not passed away.
Taxation of Death Benefit ETPs is quite complex – whether you tax or not or whether you issue a payment summary comes down to who is receiving the payment. For more information go to http://www.ato.gov.au/individuals/content.aspx?menuid=0&doc=/
Note Death Benefit ETPs ARE payroll taxable unless they are tax-free. Tax-free Death Benefit ETPs include:
- The pre 1 July ’83 component whether paid to a dependant, non-dependant or trustee
- The post 1 July ’83 component paid to a dependent up to the ETP cap limit (the excess above this is taxable to the dependent and will be payroll taxable)
In relation to the post 1 July ’83 component paid to a trustee – it may or may not be payroll taxable. The decision is based on who the ultimate recipient of the Death Benefit ETP will be. This is problematic for employers and you will have to ask the Trustee to provide the information to you. Once you have the information, you can include any applicable payroll tax in the return due the month after the information is received.