Lump sum payments can be a complex area for employers to navigate, especially regarding reporting and taxation. Accurate reporting of these payments in the current financial year is incredibly important, ensuring compliance with tax regulations.
So, in this guide, we will focus on Lump Sum E payments, which are back payments for remuneration owed to employees from previous financial years. This article will help you understand what Lump Sum E payments are, how they work, and what your responsibilities are as an employer in Australia.
What is a Lump Sum E Payment?
These payments are typically made due to oversight or delays in payment and must meet certain conditions:
- The back payment must be payable more than 12 months before the actual payment date.
- The total amount of the back payment must be $1,200 or more per employee.
Lump Sum E payments are reported differently from regular wages and must be declared separately to the Australian Taxation Office (ATO) under specific reporting categories.
When Do Lump Sum E Payments Apply?
- An employee was underpaid in a previous financial year.
- An administrative delay caused remuneration not to be paid on time.
- Back pay is owed due to a legal settlement or award.
These payments must be reported to the ATO as part of a 'pay event' under the STP Phase 2, which includes details about the financial year the Lump Sum E payment corresponds to, simplifying reporting obligations for employers.
Examples of Lump Sum E Situations:
- An employee was due a salary increase in 2022 but was only paid in 2024.
- An employer failed to pay overtime correctly in past years and is now making the payment.
The data for Lump Sum E payments will be available on the ATO platform but will not be automatically pre-filled into the Individual Income Tax Return (IITR).
Employer Responsibilities for Lump Sum E Payments
Employers are no longer required to issue employees a lump sum E letter at the end of the financial year. Instead, the relevant information will automatically be included in employees' income statements, making the process more streamlined and reducing administrative burdens on employers.
1. Reporting Lump Sum E Payments
Lump Sum E payments must be reported separately from regular wages through Single Touch Payroll (STP). The ATO requires that these payments be reported with the correct financial year they relate to, even though they are paid in the current year.
New reporting requirements aim to simplify this process by directly reporting relevant information to the ATO, thereby reducing the need for employers to issue lump sum E letters under certain conditions.
2. Taxation of Lump Sum E Payments
Lump Sum E payments are taxed according to the ATO's guidelines for back payments. These payments may push an employee into a higher tax bracket for the year they are paid, but employees can apply for a tax offset to reduce their tax liability if the back pay spans multiple years.
The tax table used for these payments is NAT 3348, which covers back payments, commissions, bonuses, and similar payments.
3. Superannuation Obligations
Superannuation contributions may or may not apply to Lump Sum E payments, depending on whether they are classified as ordinary time earnings (OTE). Superannuation contributions will apply if the payment is considered OTE (e.g., regular salary).
However, if it relates to non-OTE (e.g., overtime), superannuation does not apply.
How to Process Lump Sum E Payments
- Identify the Back Pay: Determine if the back pay meets the criteria for a Lump Sum E payment (i.e., more than 12 months old and $1,200 or more).
- Assign Reporting Category: When processing payroll, assign “Lump Sum E” as the ATO reporting category.
- Specify Financial Year: Ensure that each portion of the lump sum is allocated to the correct financial year(s) it relates to.
- Report Through STP: Submit the Lump Sum E payment information through your STP system, ensuring that all details are accurate and complete.
Watch our helpful webinar on troubleshooting payroll errors just like this one.
Table: Key Reporting Details for Lump Sum E Payments
|
Criteria |
Requirement |
|
Timeframe |
More than 12 months before date of payment |
|
Minimum Amount |
$1,200 or more |
|
Reporting Method |
Single Touch Payroll (STP) |
|
Superannuation Applicability |
Depends on whether the back pay is classified as Ordinary Time Earnings (OTE) |
|
Taxation |
Subject to special tax rates under NAT 3348 |
Common Mistakes Employers Make
- Incorrectly classifying back pay: Ensure that only back pay older than 12 months is classified as Lump Sum E.
- Failing to report correctly via STP: Make sure that each financial year is reported separately if the lump sum spans multiple years.
- Not considering superannuation obligations: Check whether superannuation applies based on whether the payment is OTE.
Key Takeaways
- Lump sum E applies when back pay is owed from more than 12 months ago and exceeds $1,200.
- These payments must be reported separately through Single Touch Payroll.
- They may affect an employee’s tax bracket but can qualify for a tax offset.
- Superannuation may or may not apply depending on whether the payment is considered ordinary time earnings.
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FAQs
1. Do I need to issue a separate statement for Lump Sum E payments?
No, under STP Phase 2, employers no longer need to issue separate end-of-year statements for Lump Sum E payments. The information will be available on employees' income statements through myGov.
2. Can employees claim a tax offset for Lump Sum E payments?
Yes, employees may be eligible for a tax offset if their lump sum pushes them into a higher tax bracket in the year it is paid. This helps reduce their overall tax liability.
3. Is superannuation payable on all Lump Sum E payments?
No, superannuation is only payable if the lump sum relates to ordinary time earnings (OTE). If it’s related to overtime or other non-OTE components, super does not apply.