Australia’s national Paid Parental Leave scheme has started and there are concerns that many SMEs are not prepared and only have scant understanding of what is involved – and there is a lot involved.
The government-funded scheme will provide parental leave pay up to 18 weeks at the national minimum wage rate (currently $589.40 per week) to eligible primary carers who have or adopt a child on or after January 1, 2011 who can satisfy work, income and residency tests.
In most cases the eligible person’s employer will provide parental leave pay. The government will pay it to the employer who will in turn pay the employee – something of a money-go-round.
The scheme has been widely applauded but it has a raft of compliance aspects (read red tape) that SMEs will need to become familiar with and comply with.
An employer must provide parental leave pay to an eligible employee who:
• Has a child born or adopted from July 1, 2011.
• Has worked for the employer for at least 12 months prior to the expected date of birth or adoption.
• Will be an employee of that employer for their paid parental leave period.
• Is an Australian-based employee.
• Is expected to receive at least eight weeks of parental leave pay.
Where an employee does not meet the above criteria the employer is not required to provide parental leave pay but if employer and employee agree the employer can choose to provide it.
Employers need to register for the Centrelink Business Online Service and opt in to provide parental leave pay before the employee lodges a claim for the scheme.
The business must have an Australia Business Number to participate in the scheme.
When employers accept the decision that they are required to provide parental leave pay to their employees they must provide bank account details and the employee’s pay cycle and pay cut-off details to Centrelink. That is designed to ensure employers can receive paid parental leave funds on time.
A few other significant points should be noted:
• Parental leave pay is taxable income for the individual who receives it and is included in a person’s adjusted taxable income (see below) for purposes of applying the relevant income tests.
• Parental leave pay counts as income for the purposes of applying the seniors’ health card and claim based (low income) health care card and the veterans’ seniors health care card income tests.
• Parental leave pay amounts are assessable income for employers and the employer is entitled to a tax deduction when amounts are paid to employees. Reasonable costs of complying with the scheme (eg the deductible component of software expenses) are also deductible, being expenses necessarily incurred by the employer in carrying on a business.
• Where the employer pays parental leave pay the employer is required to withhold PAYG amounts at the appropriate rate.
• Employers are not obliged to make superannuation guarantee payments on parental leave pay and parental leave pay has no GST or capital gains tax implications for the employer or individual recipient.
• Employees are able to salary sacrifice parental leave pay where the employer offers such an arrangement and the parental leave pay is paid by the employer.
• Payroll tax and workers compensation premiums are not payable in respect of parental leave pay.
• Because employers are not required to make super guarantee contributions payroll tax or workers compensation premiums re parental leave pay they will need to be able to separately identify parental leave pay from other amounts.
• In general taxpayers are not entitled to dependent spouse, child/housekeeper or housekeeper tax offsets for the part of the year that parental leave pay is payable.
• Parental leave pay does not affect the rate of a person’s service pension or income support supplement payable under the Veterans’ Entitlement Act 1986 nor the exceptional circumstances relief payment and farm help income support provided through the Farm Household Support Act 1992.
A person satisfies the income test for parental leave pay if the person’s adjusted taxable income for the reference income year is not more than the relevant paid parental leave income limit.
From January 1, 2011 until June 20, 2012 to satisfy the income test a person must have an adjusted taxable income of $150,000 or less for the financial year prior to the date of birth or adoption or the date of claim, whichever is the earlier. Primary claimants whose income exceeds this income limit are not eligible for parental leave pay.
In general terms, adjusted taxable income is the sum of:
• Taxable income.
• Adjusted fringe benefits (that is, reportable fringe benefits x 0.535).
• Tax-free pensions or benefits, eg disability support pension paid to a person who is not old enough to receive the age pension, wife pension, where both the recipient and spouse (if applicable) are not old enough to receive age pension, invalidity service pension, where the recipient is not old enough to receive the age pension.
• Income from overseas not reported in your tax return, eg gifts or allowances of money from any foreign source on a regular basis (including regular money or gifts received from relatives living overseas), an overseas pension or benefit that is not assessable income.
• Reportable superannuation contributions – this includes reportable employer super contributions (eg salary sacrificed super contributions) and personal deductible contributions.
• Total net investment losses, eg from shares, managed investment schemes (includes both net financial investment losses and net rental property losses).
• Child support the person has paid.
Because paid parental leave is taxable and eligibility partly depends on satisfying the $150,000 adjusted taxable income test SMEs might need to seek the assistance of their accountants and tax agents.
There are quite a few details and mechanics to comply with for the new scheme and a Paid Parental Leave Guide can be found on the Families, Housing, Community Services and Indigenous Affairs website. Information is also on the Centrelink website.
Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.
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