Paying out leave owing to a deceased's dependent or estate can be a confusing process. As the article on Special Tax File Numbers indicates, you need to use the dependent's TFN, but it goes a little further than that - you will need to set the dependent up as an employee for the purposes of the payment, create a new pay category to pay the leave and use leave adjustments to reduce the balances for the deceased employee. The process is outlined below. Note this process is for non-ETP payouts - how to handle ETPs in regards to death benefits is referenced towards the end of this article.
1. Set the dependent up as a new employee. The relevant details are the dependent's personal details, TFN and bank account details - employment type, pay rate and so on are irrelevant and any value can be entered.
2. Create a new pay category to pay out the leave (or two, if you want the leave to show on two lines ie Annual and Long Service Leave). Call it 'Leave Payout - Deceased' or whatever will be relevant. The conditions of the category are:
- Unit type is 'Fixed'
- Ticked to be 'PAYG exempt' (you do not withhold from payments for unused annual leave, leave loading and unused long service leave made after the death of an employee)
- Super rate is 0% (leave payouts are non superable)
- Payment Classification is 'Exclude from Payment Summary (Income Statement).
3. Run a Leave Balances report as of the date of the deceased employee's last pay to determine how many leave hours need to be paid out and the value of the leave.
4. Create an ad hoc pay run and add the deceased employee and the dependent.
For the dependent:
Select their 'Actions' button > 'Add Earnings' button and select the new pay category. Enter 1 into the unit field and the full value of the leave owing as per the Leave Balances report in the rate field (if you are using two categories to split between AL and LSL, repeat this action and enter in the other value in the second earnings line).
For the deceased:
Select their 'Actions' button > 'Adjust Leave' and select Annual Leave. In the unit field, enter the total balance of AL hours as a negative figure. Do not tick the 'Apply Earnings Rules' box. Do the same again to create another Leave Adjustment line, select Long Service Leave and enter the total balance of Long Service Leave hours as a negative figure, again ensuring you do not tick 'Apply Earnings Rules'. This will reduce the balances for the deceased employee to 0.
5. Once you have entered this, finalise the pay run and create the STP Pay event as per usual. Manually mark the deceased employee as 'Is Final' by ticking this box on the far right, then lodge to the ATO.
6. Go into the deceased employee's record and mark them as terminated from their Employee Details page (section 2 of the linked article). Do the same for the dependent.
Handling Death Benefits ETPs
If you are paying an ETP, a similar process can be applied as above when recording the payment to the trustee, dependent etc however the setup of the pay category will change depending on the scenario in which it is being paid. The following payment classifications can be applied instead of 'Exclude from Payment Summary':
- ETP (Death benefit) - Code D: This is a death benefit payment directly to a dependant of the deceased employee. A dependant may include a spouse of the deceased, a minor child, a person who had an interdependency relationship with the deceased or a person who was a dependant of the deceased just before the latter died.
- ETP (Death benefit) - Code N: This is a death benefit payment directly to a non-dependant of the deceased employee. A non-dependant is a person who is not a dependant of the deceased and not a trustee of the deceased estate.
- ETP (Death benefit) - Code B: This is a multiple payment for a death benefit ETP code N for the same deceased person, where the later payment is paid in a subsequent financial year from the original code N payment.
- ETP (Death benefit) - Code T: This a death benefit payment directly to a trustee of the deceased estate. This person may be an executor or administrator who has been granted probate or letters of administration by a court.
It's important that you check with the estate, your payroll support and/or the ATO to determine which code to use. You will also need to perform the tax calculations manually (if relevant) and apply any required PAYG adjustments to the pay run as the functionality to calculate death benefits ETP automatically is not yet available.