This article guides you through the correct process to follow when retrospectively changing an employee's employing entity as well as how to correctly report the employee's split earnings by entity via STP. Because of the nature of STP reporting and the fact it reports YTD earnings with the employing entity attached against each event, it is extremely essential the process is followed exactly as stated here, otherwise employee earnings will be incorrectly reported and overstated.
Correct method of reporting STP where a retrospective employing entity change has occurred for an employee
If, during the financial year, an employee's employing entity was meant to be changed, but was not done so on the effective date, you can still retrospectively apply an employing entity change. To do this, refer to the section "Assigning an Employee to an Employing Entity" from these instructions. N.B. You must have created the new employing entity within the system before assigning to the employee. It is best that you create an employing entity rather then changing the legal name and ABN details via the payroll setting's Details screen as this creates a whole other can of worms! If the legal name/ABN set within the payroll setting's Details screen is no longer current for the business you can change them once the financial year has passed and the final STP events for the financial year have been lodged AND before any STP events have been lodged for the new financial year.
Once you have changed the employee's employing entity, you must report this to the ATO immediately via an STP update event. This must be reported via an update event and NOT a pay event because the pay event will not report the correct earnings. An update event will "refresh" the employee's earnings and split them correctly according to the different employing entities and based on the effective date of the employing entity change. Let me clarify with an example:
Daniel has been employed by Advanced Australia Fair Pty Ltd from the commencement of the financial year. In November, the payroll officer discovers that Daniel's employing entity change to A & J Hollows Pty Ltd (that was due to take effect from 1 October) was not acted upon and so the payroll officer retrospectively applied the entity change (as per the instructions above). The last pay event lodged with the ATO for Daniel (in November) looks as follows:
The above events shows the employee's YTD earnings that were reported against the initial employing entity, Advanced Australia Fair Pty Ltd. The payroll officer though now needs to report the separated earnings by entity. To do this, an update event is created and looks as follows:
You can see that these earnings are now correctly split by each employing entity. The earnings assigned against A & J Hollow Pty Ltd are based on the effective date of the employing entity change and earnings processed in pay runs from that date. This update event can now be lodged with the ATO to update the status of Daniel's earnings. Prior to lodging the event, we would also recommend ticking the "Is final" checkbox against the earnings for Advanced Australia Fair Pty Ltd as the employee will no longer have any further earnings reported against that entity in the financial year (as the entity A & J Hollow Pty Ltd is the new entity employing Daniel). Once the update event has been successfully lodged, you can proceed with lodging pay events after each pay run as per the normal process.
Now, imagine you didn't lodge an update event immediately after retrospectively changing an employee's employing entity and instead lodged a pay event once the subsequent pay run was processed? The pay event would look as follows:
N.B. There is an earnings difference for A & J Hollow Pty Ltd between this event and the update event because this pay event includes a subsequent pay run and so the earnings are higher.
The major difference between this event and the update event is this pay event does not include any earnings under the previous entity Advanced Australia Fair Pty Ltd. What does this mean? It means that the ATO have a record of YTD earnings reported for Daniel under Advanced Australia Fair Pty Ltd to the amount of $8524.96 (ie the first pay event example shown above). If this pay event was then lodged, the ATO would have a second record for Daniel showing YTD earnings A & J Hollow Pty Ltd of $4913.44. This means the ATO has a record of the following earnings for Daniel:
- Advanced Australia Fair Pty Ltd = $9124.96
- A & J Hollow Pty Ltd = $4913.44
- Total YTD earnings = $14038.40
The employee's actual YTD earnings at this stage though is:
- Advanced Australia Fair Pty Ltd = $4913.44
- A & J Hollow Pty Ltd = $4913.44
- Total YTD earnings = $9826.88
So, as a result of not lodging the update event immediately and rather lodging a subsequent pay event is that the employee's YTD earnings have been over reported to the ATO by $4211.52.
If you fall into the above category and have not reported STP correctly following a retrospective employing entity change, refer to the next section on how to resolve the issue.
Process of rectifying incorrect STP reporting following a retrospective employing entity change for an employee
The first section above explains the consequence of not reporting the employing entity change correctly to the ATO. In summary, the issue is that YTD earnings reported against the first employing entity are overstated. So it's this component of what has been reported that needs to be resolved. To do this, follow these steps:
- Assign the initial employing entity back to the employee (using the example above, we would reassign the Advanced Australia Fair Pty Ltd employing entity to Daniel).
- The effective date of the entity change should be the original date the employee was assigned to that initial entity.
- Create a reset earnings event using the initial employing entity as the filter and select the affected employee(s) as well.
- The reset earnings event will list the affected employee(s) and have $0 earnings displayed against all earnings components. Don't fret - this is what we want to see! In order to fix the over reported earnings under the initial employing entity we basically have to wipe the slate clean and start with $0 earnings. This is what the reset earnings event will achieve.
- Lodge the reset earnings event with the ATO. Wait till you know it has been successfully lodged.
- Reassign the employee's employing entity back to the current entity (using the example above, we would now assign the A & J Hollow Pty Ltd employing entity to Daniel).
- The effective date of the entity change should be the effective date the employee commenced employment under the current entity.
- Create an update event for the pay schedule the employee is attached to - in this update event 2 earnings lines should be displayed for the employee as the earnings should be separated by employing entity. Ensure the total amounts match up with the earnings reported in the Detailed Activity Report. If the earnings appear and are split correctly, lodge the update event.
In lieu of step 8 and depending on where you're at with end of year reporting (if it end of financial year time), you could create a finalisation event in lieu of an update event so you can commence your STP finalisation process at the same time. The finalisation event will achieve the same result as the update event. Alternatively, if you have already lodged the finalisation event for that pay schedule, you can lodge an amended finalisation event instead.
Please contact us at firstname.lastname@example.org if you have questions.