Session 3 - 04 Taxes, Salaries, Wages and Leaves

Summary

This script discusses various aspects of payroll and taxation in Australia, including Fringe Benefits Tax, which targets non-cash benefits to avoid tax evasion. It covers annual and maternity leave, differentiating between wages and salaries, and the importance of accurate timesheet management. The script also explains redundancy pay, salary allowances, gross and net salaries, unearned income, and work in progress. Additionally, it touches on retention in construction, explaining how it serves as a financial safeguard against defects during a defect liability period.

Takeaways

• 📊 Fringe Benefits Tax (FBT) was introduced to prevent businesses from avoiding Pay As You Go (PAYG) withholding tax by providing non-cash benefits to employees.
• 💼 FBT requires employers to 'gross up' the value of non-cash benefits provided to employees and pay a tax rate of 48.5% on these amounts.
• 🌴 Annual leave is accrued by employees in Australia, amounting to four weeks or 152 hours per year, similar to practices in other countries like Serbia.
• 🤰 Maternity leave is a benefit provided to pregnant women, allowing them to take time off work for childbirth and recovery.
• 💰 The terms 'wages' and 'salaries' differentiate between hourly pay and fixed annual payments, respectively.
• ⏰ Timesheets are used to track hours worked, especially in industries like construction, and are essential for calculating payroll.
• 🔄 Redundancy pay is required in Australia for employees who have been with a company for over a year and are laid off due to restructuring, with specific formulas available for calculation.
• 📋 Salary allowances are additional benefits negotiated by employers to enhance the attractiveness of a job offer, covering expenses like travel or meals.
• 💡 Gross salary represents the total cost to the employer before deductions, while net salary is what the employee actually receives after deductions, excluding superannuation.
• 📈 Unearned income or revenue refers to income received in advance for work not yet performed, which is accounted for separately until the work is completed.
• 🏗️ Work in progress accounting is crucial in industries like construction and professional services, where expenses are incurred before invoicing can occur, requiring estimation of revenue based on project completion.
• 🔒 Retention is a practice in construction where a portion of payment is withheld until a defect liability period has passed, ensuring the contractor returns to fix any issues.
• 🏦 Cash retention and bank guarantees are two methods used to secure retention payments, with the latter involving a financial institution guaranteeing payment if certain conditions are met.

Q & A

What is Fringe Benefits Tax and why was it introduced?

Fringe Benefits Tax is a tax levied on non-cash benefits provided to employees. It was introduced because some employers were reducing cash salaries and instead offering benefits like school fees to avoid Pay As You Go (PAYG) withholding tax. The tax ensures that these benefits are treated similarly to payroll for tax purposes.

How is the Fringe Benefits Tax calculated?

The exact calculation method for Fringe Benefits Tax is not detailed in the transcript, but it involves a 'grossing up' of the benefit amount as if it were part of the employee's salary. The employer then pays a tax rate, which was mentioned to be around 48.5%, on this grossed-up amount.

What is Annual Leave and how is it accrued in Australia?

Annual Leave is the time off work granted to employees, similar to holidays. In Australia, employees accrue four weeks, or approximately 152 hours, of annual leave each year based on their employment duration.

Can you explain Maternity Leave in the context of the script?

Maternity Leave is the period of leave taken by a woman who is pregnant. The script does not provide specific details about maternity leave policies, but it is generally a type of leave provided to support women during pregnancy and after childbirth.

What is the difference between Wages and Salary as mentioned in the script?

Wages are typically paid on an hourly basis and can vary depending on hours worked. Salary, on the other hand, is a fixed sum paid to an employee, often on a monthly basis, regardless of the number of hours worked.

What is a Time Sheet and how is it used in payroll?

A Time Sheet is a document used to record the hours an employee has worked. It tracks start times, breaks, and end times, and is used to calculate the pay for hours worked, especially in industries like construction.

What is Redundancy and how is it calculated in Australia?

Redundancy is a form of severance pay given to employees when their position is no longer required due to restructuring or other reasons. In Australia, there is a formula to calculate redundancy pay, which is available online, and it applies to businesses with more than 15 employees and positions held for over a year.

Why is it important to handle payroll accurately, especially in cases of redundancy?

Accurate payroll is crucial because if an overpayment is made and the employee does not wish to return the funds, the employer cannot force them to do so. Even for current employees, overpayments cannot be deducted from their next pay without an agreement, as it could affect their ability to support their family.

What is a Salary Allowance and how does it function in an employment context?

A Salary Allowance is an additional payment negotiated by an employer and an employee, over and above the base salary. It can be for various purposes such as travel or meals, and is used to make a salary package more attractive to secure talent.

Can you explain the difference between Gross Salary and Net Salary?

Gross Salary refers to the total cost to the employer of the salary before any deductions, excluding superannuation. Net Salary is the amount an employee receives after all deductions, excluding superannuation, which is the actual take-home pay.

What is Unearned Income or Revenue and how is it accounted for?

Unearned Income or Revenue refers to income that has been received but not yet earned through work or service provided. It is accounted for by moving it from the income account to an account called Unearned Income or Revenue, and then recognizing it in the profit and loss account when the work is done.

What is Work in Progress and how does it relate to revenue recognition?

Work in Progress refers to the expenses incurred and work done on a project that has not yet been invoiced or completed. It is accounted for by recognizing a portion of the revenue relative to the percentage of the project completed, ensuring that expenses and revenue are matched appropriately.

Can you describe Retention in the context of construction contracts?

Retention is a portion of the contract payment that a client withholds until the end of a project to ensure that any defects are fixed within a specified period, known as the defect liability period. It acts as a form of insurance for the client against potential issues with the completed work.

What are the two ways of financing retention mentioned in the script?

The two ways of financing retention mentioned are cash retention, where the client keeps a portion of the payment in cash, and bank guarantee, where the service provider gives a bank guarantee to cover any issues that may arise, essentially risking their assets if there are problems with the work.