Introduction
Upon termination - when an employee is leaving an organization - he/she will receive lumpsum payments which are taxed differently than the regular income. One such lumpsum payment is employment termination payments (ETP).
As an example, the ETP may include but is not limited to:
An employee may also receive lump sum payments for unused annual leave or long service leave, or the tax-free part of a genuine redundancy or early retirement scheme. These aren't part of ETP but they may also be taxed at a concessional rate.
The client and their team is responsible to understand which payments go under ETP and which do not - the consultant is not considered an expert to make those calls. However, when a payment being included by the client under ETP is suspected by the consultant to not belong there, they can check the ATO website and also check with legal teams to ensure the labor laws of the land are respected while building the system. The legal aspects of whether payments are included or excluded from ETP is not in scope of this blog post. Instead, this blog post only aims at providing pure configuration and consulting guidelines for someone who is working to implement a payroll solution in SAP/ECP for an Australian client.
1. Mapping client termination actions and termination action reasons
1a. Configuration Perspective: As a configuration consultant, I need to know which termination actions/action reasons do I need to set up in the system and which ones of these will trigger death benefits/ Life benefit ETPs etc. – basically, I need to know what redundancy / termination reasons to be set up and what termination action will trigger the employee record delimiting process in IT 0 when the termination organizer is run in update mode. Whatever the termination action that I decide to use, I need to set that up in the feature 13TRM to be used as a default termination action number in IT 0 while termination is completed through termination organizer.
1b. Consultant Perspective: As a consultant, I now need to provide answers to the questions from my configuration consultant so that she can use the details to perform the steps in (1a). For this purpose, I ask the client the following questions in the workshop:
a) Get a list of all their current termination events & event reasons from your client. Sift through the list and map them such that at the end of the exercise, you and your client agree on a single termination action and multiple action reasons that fall into neatly divided groups in the blueprint. Based on the answers to this question the configuration consultant will set up the feature 13TRM and the entries in the table V_T530.
b) We will then categorize these action reasons into one of the pre-defined SAP categories for action reasons which are: redundancy, invalidity, death – trustee of deceased, death-dependent, death – other, approved early retirement or blank(any other reason such as resignation, dismissal etc.). Based on the answers to this question and the corresponding mapping of the action reasons in the blueprint, the configuration consultant will set up the redundancy models and map them to preset categories in V_T5Q30.
2. What rules govern leave payments/leave without pay impact on years of service/ eligible termination payments (ETP)?
2a. Configuration perspective: As a configuration consultant, my main concern is to understand what leave payouts/ETP etc. are triggered on termination/redundancy as well as the correct calculation of years of service in cases where an employee has been on loss of pay leave/unpaid leave. I will need to know how I need to classify my terminations/redundancy payouts based on several classifications such as action type reasons, organizational elements such as employee subgroups etc. This will essentially help me to configure the redundancy models in the feature 13RDN which will then be used further to classify leave quota payments/years of service/ termination payments and ETP. A configuration consultant also needs to understand if the years of service are to be calculated from IT 0023 – Other / Previous employers and whether the termination date or the notice date needs to be used for calculation of the ETP/ projection of leaves.
2b. Consultant perspective: As a consultant, I will get together with my client and pose the below questions in a workshop to understand:
a) Do you have different payment criteria for your employees, say for e.g. severance pay for employee subgroups Q1 to Q4 is 2 weeks pay while for the subgroups Q5 to Q7 it is 4 weeks? [Based on the answer to this question multiple configuration points are set up but the most basic which the consultant will document in the blueprint is for building the feature 13RDN]
b) In order to set up the non taxable portion of the ETP, we need to understand if any of the redundancy wage types currently being used by the client are lumpsum D or invalidity payments. Once we have a clarity on the categories of the redundancy wage types then this will help us in setting up the blueprint for populating the table V_T5QRP which will link the redundancy models set up in (a) with the wage types that are configured for being non taxable component of the ETP for lumpsum D or invalidity.] It is to be noted here that not all ETP are lumpsum D or invalidity payments. Also, these wage types we design in the table V_T5QRP will be generated only in cases of redundancy and not other cases such as resignation. Hence we need to make sure that the redundancy models being set up in the table are pertaining only to redundancy and not other reasons like dismissal or resignation.
c) Ensure that you double check and confirm with the client on all the termination and redundancy payments to be configured in the system. [This information will help us build the blueprint with assignment of the termination wage types to the termination wage type group in the system i.e. under the group TRM2 and table VV_52D7_B_TRM2_AL0]
d) There are three different categories under which the wage types for payment are classified into in the table V_T5QRP namely, Lumpsum D, Invalidity payment and Others. Lumpsum D indicates payments that are to be included in the calculation of lumpsum D - this includes both redundancy and early retirement options. When this option is used, it includes that particular payment in the lumpsum D calculation else it does not. Similarly for invalidity payments. The reason we have different categories is to apply different formulas for the calculations of the taxation / tax free components and such. For more details on the calculations/ inclusions of the payments/ classifications / formulas for calculation etc. can be found on the ATO website.
3. Classifying the redundancy wage types into categories for payments
3a. Configuration perspective: As a configuration consultant my most important concern about redundancy payments is the different tax implications for the various ETP. When I set up wage types, I need to consider two important processing classes i.e. 77 and 78 along with the evaluation class 12. Processing class 77 will tell the termination organizer how to create the wage types for taxation purpose. For e.g. for Death (Non – Dependent) there can be two different specifications for Pr. Class 77 as U or V based on capping considerations. Also, I will need to know which wage types do I need to consider to calculate severance pay, additional payments or payment in lieu of notice period. For this purpose, I will use the processing class 78 to include/exclude the particular wage types in calculation of severance/additional payments/lieu of notice. For e.g. if I want to include base salary in the calculation then I will mark Pr. Class 78 for base salary wage type as required from the list of options in the processing class. In cases where taxation needs to be overridden, the processing class 66 shall be used and the corresponding wage types need to be set up as wage types for tax override in Taxation node of Australia payroll in SPRO.
3b. Consultant perspective: As a consultant my approach to this portion of the termination / redundancy set up has been to copy the model SAP wage types into customer specific name space and put them into the blueprint document. On the day of the workshop, I would sit together with the client and go through the list and strike off whichever wage types are not relevant for them as per their current process being followed. The model wage types come with preset values in the processing classes as well as evaluation classes. Also, understanding that SAP has already put in a lot of research in setting up these wage types, it becomes a robust starting point for the workshop to take off. In case there are some wage types that the client uses currently that do not match into these model wage types, then the questions to ask would center around what kind of wage type it is, which specification in Pr. Class 77 would fit in and thereby set up the new wage type in accordance to the already existing model wage type with a little tweak.
Conclusion
The ETP configuration is vital for termination scenarios in Australia. In addition the understanding of how the termination organizer works is also equally critical. For details on the termination organizer configuration / consultant guide, do refer to my blog here.
Upon termination - when an employee is leaving an organization - he/she will receive lumpsum payments which are taxed differently than the regular income. One such lumpsum payment is employment termination payments (ETP).
As an example, the ETP may include but is not limited to:
- Payments for unused sick leave or unused rostered days off
- Payments in lieu of notice
- A gratuity or 'golden handshake'
- An invalidity payment for permanent disability.
An employee may also receive lump sum payments for unused annual leave or long service leave, or the tax-free part of a genuine redundancy or early retirement scheme. These aren't part of ETP but they may also be taxed at a concessional rate.
The client and their team is responsible to understand which payments go under ETP and which do not - the consultant is not considered an expert to make those calls. However, when a payment being included by the client under ETP is suspected by the consultant to not belong there, they can check the ATO website and also check with legal teams to ensure the labor laws of the land are respected while building the system. The legal aspects of whether payments are included or excluded from ETP is not in scope of this blog post. Instead, this blog post only aims at providing pure configuration and consulting guidelines for someone who is working to implement a payroll solution in SAP/ECP for an Australian client.
Configuring ETP in SAP/ EC Payroll
1. Mapping client termination actions and termination action reasons
1a. Configuration Perspective: As a configuration consultant, I need to know which termination actions/action reasons do I need to set up in the system and which ones of these will trigger death benefits/ Life benefit ETPs etc. – basically, I need to know what redundancy / termination reasons to be set up and what termination action will trigger the employee record delimiting process in IT 0 when the termination organizer is run in update mode. Whatever the termination action that I decide to use, I need to set that up in the feature 13TRM to be used as a default termination action number in IT 0 while termination is completed through termination organizer.
1b. Consultant Perspective: As a consultant, I now need to provide answers to the questions from my configuration consultant so that she can use the details to perform the steps in (1a). For this purpose, I ask the client the following questions in the workshop:
a) Get a list of all their current termination events & event reasons from your client. Sift through the list and map them such that at the end of the exercise, you and your client agree on a single termination action and multiple action reasons that fall into neatly divided groups in the blueprint. Based on the answers to this question the configuration consultant will set up the feature 13TRM and the entries in the table V_T530.
b) We will then categorize these action reasons into one of the pre-defined SAP categories for action reasons which are: redundancy, invalidity, death – trustee of deceased, death-dependent, death – other, approved early retirement or blank(any other reason such as resignation, dismissal etc.). Based on the answers to this question and the corresponding mapping of the action reasons in the blueprint, the configuration consultant will set up the redundancy models and map them to preset categories in V_T5Q30.
2. What rules govern leave payments/leave without pay impact on years of service/ eligible termination payments (ETP)?
2a. Configuration perspective: As a configuration consultant, my main concern is to understand what leave payouts/ETP etc. are triggered on termination/redundancy as well as the correct calculation of years of service in cases where an employee has been on loss of pay leave/unpaid leave. I will need to know how I need to classify my terminations/redundancy payouts based on several classifications such as action type reasons, organizational elements such as employee subgroups etc. This will essentially help me to configure the redundancy models in the feature 13RDN which will then be used further to classify leave quota payments/years of service/ termination payments and ETP. A configuration consultant also needs to understand if the years of service are to be calculated from IT 0023 – Other / Previous employers and whether the termination date or the notice date needs to be used for calculation of the ETP/ projection of leaves.
2b. Consultant perspective: As a consultant, I will get together with my client and pose the below questions in a workshop to understand:
a) Do you have different payment criteria for your employees, say for e.g. severance pay for employee subgroups Q1 to Q4 is 2 weeks pay while for the subgroups Q5 to Q7 it is 4 weeks? [Based on the answer to this question multiple configuration points are set up but the most basic which the consultant will document in the blueprint is for building the feature 13RDN]
b) In order to set up the non taxable portion of the ETP, we need to understand if any of the redundancy wage types currently being used by the client are lumpsum D or invalidity payments. Once we have a clarity on the categories of the redundancy wage types then this will help us in setting up the blueprint for populating the table V_T5QRP which will link the redundancy models set up in (a) with the wage types that are configured for being non taxable component of the ETP for lumpsum D or invalidity.] It is to be noted here that not all ETP are lumpsum D or invalidity payments. Also, these wage types we design in the table V_T5QRP will be generated only in cases of redundancy and not other cases such as resignation. Hence we need to make sure that the redundancy models being set up in the table are pertaining only to redundancy and not other reasons like dismissal or resignation.
c) Ensure that you double check and confirm with the client on all the termination and redundancy payments to be configured in the system. [This information will help us build the blueprint with assignment of the termination wage types to the termination wage type group in the system i.e. under the group TRM2 and table VV_52D7_B_TRM2_AL0]
d) There are three different categories under which the wage types for payment are classified into in the table V_T5QRP namely, Lumpsum D, Invalidity payment and Others. Lumpsum D indicates payments that are to be included in the calculation of lumpsum D - this includes both redundancy and early retirement options. When this option is used, it includes that particular payment in the lumpsum D calculation else it does not. Similarly for invalidity payments. The reason we have different categories is to apply different formulas for the calculations of the taxation / tax free components and such. For more details on the calculations/ inclusions of the payments/ classifications / formulas for calculation etc. can be found on the ATO website.
3. Classifying the redundancy wage types into categories for payments
3a. Configuration perspective: As a configuration consultant my most important concern about redundancy payments is the different tax implications for the various ETP. When I set up wage types, I need to consider two important processing classes i.e. 77 and 78 along with the evaluation class 12. Processing class 77 will tell the termination organizer how to create the wage types for taxation purpose. For e.g. for Death (Non – Dependent) there can be two different specifications for Pr. Class 77 as U or V based on capping considerations. Also, I will need to know which wage types do I need to consider to calculate severance pay, additional payments or payment in lieu of notice period. For this purpose, I will use the processing class 78 to include/exclude the particular wage types in calculation of severance/additional payments/lieu of notice. For e.g. if I want to include base salary in the calculation then I will mark Pr. Class 78 for base salary wage type as required from the list of options in the processing class. In cases where taxation needs to be overridden, the processing class 66 shall be used and the corresponding wage types need to be set up as wage types for tax override in Taxation node of Australia payroll in SPRO.
3b. Consultant perspective: As a consultant my approach to this portion of the termination / redundancy set up has been to copy the model SAP wage types into customer specific name space and put them into the blueprint document. On the day of the workshop, I would sit together with the client and go through the list and strike off whichever wage types are not relevant for them as per their current process being followed. The model wage types come with preset values in the processing classes as well as evaluation classes. Also, understanding that SAP has already put in a lot of research in setting up these wage types, it becomes a robust starting point for the workshop to take off. In case there are some wage types that the client uses currently that do not match into these model wage types, then the questions to ask would center around what kind of wage type it is, which specification in Pr. Class 77 would fit in and thereby set up the new wage type in accordance to the already existing model wage type with a little tweak.
Conclusion
The ETP configuration is vital for termination scenarios in Australia. In addition the understanding of how the termination organizer works is also equally critical. For details on the termination organizer configuration / consultant guide, do refer to my blog here.
- SAP Managed Tags:
1 Comment
