Create a pay item for an employment termination payment

Set up a pay item for an employment termination payment (ETP), and add it to an employee's final payslip. You can also send or print ETP summaries.

How it works

  • You can create a pay item for an ETP – Type R or O.
  • You may not need an ETP pay item for some 'Type O' ETPs, such as unused sick leave and rostered days off. Instead, set the unused leave as paid out on termination.
  • If you're processing an ETP with both a tax-free and taxable component:

Set up an ETP pay item and add it to a payslip

Before you start: Approve leave requests dated before the employee's termination date. Reject requests dated after the employee's termination date. See Approve or reject leave requests.

Set up the pay item

  1. In the Settings menu, select Payroll Settings.
  2. Click the Pay Items tab.
  3. In Earnings, click Add, then select Employee Termination Payments.
  4. Enter the details for the ETP. Under ETP Type, select either Type R or Type O.
    • Type R: payments due to an early retirement scheme, a genuine redundancy, invalidity or compensation (personal injury, unfair dismissal, harassment or discrimination).
    • Type O: payments not described under R, including a golden handshake, gratuity, payment in lieu of notice, or payments for unused sick leave or rostered days off.
  5. (Optional) Select the ETP tax-free component checkbox. Don't select the checkbox if you're creating a pay item for the taxable component of a genuine redundancy or early retirement.
  6. (Optional) Select the Reportable as W1 on Activity Statement checkbox.
  7. Click Add.

Add the pay item to the employee’s payslip

  1. In the Payroll menu, select Pay Runs.
  2. Add a new pay run to process the employee's final pay, or open the draft pay run if you've already set one up.
  3. Click the employee's name to open their payslip.
  4. Click Set as Final Pay at the bottom of the payslip.
  5. Set a Termination Date that falls on, or before, the end of the current pay period.
  6. Select the Final pay type, and fill in the details as required.
  7. Click Save.
  8. Under Earnings Rate, click Add Earnings Line.
  9. Under Earnings Rate, select the ETP pay item, then click OK.
  10. Click the Fixed Amount field in the earnings line to adjust the payment.
  11. If a tax applies to the ETP, Xero sets the default rate at 32 percent. You can manually adjust the ETP tax as needed. See Taxation of termination payments (ATO website) for more information.
  12. (Optional) Under Tax Type, click Add Tax Line to adjust the ETP’s tax:
    • Under Tax Type, select Manual Adjustment – Tax on ETP [Type R or O].
    • (Optional) Enter a description for the adjustment.
    • Click OK.
    • Click the Amount field to adjust the withheld amount.
  13. After you've reviewed the payslip, click Save, then Close.
  14. Post the pay run. Your employee's final payslip will contain ETP details, including applicable taxes.

Send or print ETP summaries

Xero keeps a record of your ETPs. You can send ETP summaries to employees or download them to print.

  1. In the Payroll menu, select Employees.
  2. Click Payment Summaries.
  3. Enter your organisation's details, then click Confirm and Continue.
  4. Under Financial Year Ending, select the year the ETP occured.
  5. In the Employment Termination Payments table, select the checkbox next to an employee’s name to select a single payment. Otherwise, select the checkbox next to Employee to select all payments.
  6. (Optional) To preview ETP summaries, click Preview. Xero will generate a PDF file to open and view.
  7. To send or print ETP summaries, click Send to Employee.
  8. (Optional) Select the Send selected Employment Termination Payments to Employees via email checkbox.
  9. (Optional) Select the Generate PDF for printing checkbox.
  10. Click Confirm.

At this stage, you'll need to download and print a PAYG payment summary form to lodge the ETP with the ATO. See PAYG payment summary statement (ATO website).