How to manage the accounting logistics of PPL in your business

How to manage the Paid Parental Leave payroll process

So you have an employee about to go on parental leave? While this is an exciting time for them, amid the congratulations you may be starting to think about the web of bookkeeping and payroll issues that the Paid Parental Leave Scheme can bring.

What is Paid Parental Leave?

Paid Parental Leave (PPL) is a government scheme that currently entitles employees of up to 22 weeks of pay at the national minimum wage* if they meet eligibility criteria set by Services Australia, summarised below.

As an employer, provided you register with Services Australia, you will be sent the PPL to reimburse via your usual payroll function and disburse to your employee net of any applicable withholding taxes.

In order to register with Services Australia, you will need to do so online through their Business Hub portal or by phone.

An employee can choose to take the full 22 weeks of leave themselves, or they may choose to share Parental Leave Pay with a partner. The birth parent or first adoptive parent needs to approve the number of Parental Leave Pay days they're sharing.

Who can get Paid Parental Leave?

Currently, PPL of up to 22 weeks is available to be shared between parents of a newborn or newly adopted child as they choose.

In order to qualify for PPL, the parent must:

Meet the income test.
Meet the work test.
Have registered the child’s birth.

Not work, except for allowable reasons.
Be caring for a child who is born or adopted from 1 July 2024 (parents of children born prior will still be eligible for PPL, but at earlier rates).

As the employer, it is not your responsibility to determine whether or not your employee is eligible to receive PPL. This is up to the employee to determine and will be covered in their application for PPL payments through Services Australia.

A step-by-step guide to setting your business up to receive PPL payments

Below is a step-by-step guide to help you and your employee get the application process started so you’re all ready to go once the baby comes.

Step one: The employee application process

The best time to start the application for PPL is before the baby is born. Doing this will mean that, most of the time, payments will be ready to commence once the baby arrives, and will help avoid things such as resolving application and payroll issues while your employee juggles a newborn.

An employee is able to lodge their claim up to three months before the anticipated birth date. If your employee is approaching the final 12 weeks or work, it's worth prompting them and directing them to the Services Australia website so they can check the eligibility criteria and start the application process.

TIP: It's extremely important that your employee notes the correct contact address for your business, including address and ABN details. Many applications are held up and lost where incorrect contact details for the payroll side of the business are provided by an employee in their application process. To avoid any lost post you may wish to specifically provide your employee with the necessary contact details of the business that should be provided on their application form to ensure this letter arrives where it should!

Step two: Receiving the Employer Determination letter

Once your employee has completed their initial application process, you should receive a letter from Services Australia advising that as the employer nominated on the form, you will be required to pay your employee PPL. This letter is very important to the process and is the catalyst for the employer’s responsibilities in the scheme.

The letter outlines next steps for you as an employer and also provides some general information about how the process will work. It’s worth asking your employee to let you know once they have submitted their application to Services Australia so you can keep an eye out for the letter to come through.

Step three: Replying to the letter

As an employer, you need to reply to the Employer Determination Letter within 14 days. A reply needs to either accept the determination or apply for a review. The easiest way to reply to this letter is via the Business Hub (discussed below). You can also apply in writing, however this carries with it the usual risks of postal delays etc.

A response is required to ensure the employee’s application is processed and not cancelled by Services Australia. In our experience this letter is one of the key sticking points of the application process, with letters being lost, sent to the wrong address or never responded to resulting in lengthy delays of the payments.

Step four: The employer registration process

An employer is not technically required to register with Services Australia until the Employer Determination letter is received. However, in the interest of time you can register early. Where time permits, we would recommend registering as soon as you know your employee intends to take PPL.

Unfortunately, the registration process must be completed by the business owner directly (not by the bookkeeper or accountant). The following steps need to be taken to complete online registration:

Before you do anything, make sure you are listed as a director of your business on the Australian Business Register.
Next, create a Provider Digital Access (PRODA) account. PRODA is an online identity verification and authentication system for securely accessing online government services. You must already have a PRODA account before you can register for the Business Hub.

You will need to register for PRODA as an individual i.e. the business owner and be able to verify your identity – so be prepared with 100 points of identification.

Once your personal identity is verified, add your business relationship to your profile. To do this you need to ensure you have all accurate information for the business including ABN, ACN, registered office etc.
For additional guidance on this step visit the Services Australia website.
Once you personally have a PRODA and the Business has a PRODA, you can nominate authorised persons to access the online business account, such as a bookkeeper or accountant.

Business Hub: once you’ve registered the business with PRODA via the Organisations menu you can select Business Hub as a service provider to connect with.

Step five: The Business Hub

Once you have your PRODA account and linked to the Business Hub, you will be able to electronically manage your communications with Services Australia.

Step six: Payments start date

Services Australia will confirm when your employee’s PPL period will start and end via the Business Hub. You must provide PPL payments according to your employee’s normal pay cycle.

Setting up your payroll software

With the registration process taken care of, the next step is to set up your usual payroll function to cater for your employees’ PPL payments. Services Australia confirms that you are not required to pay your employee until you have the funds from them. That is, the business does not need to pay the employee out of their own budget.

Services Australia generally provide payments in either fortnightly or six-weekly instalments, depending on your usual payroll cycle. The payments can be deposited into your normal business bank account. You do not need a separate account to receive or process the payments.

The following instructions relate specifically to how the PPL process can be undertaken via Xero payroll, however the concept should be applicable to any payroll software. To set up the payroll / accounting side of the payments we recommend you take the following steps.

Please note the information below is based on the payment of the government paid parental leave. Any leave or superannuation paid above this should be factored in separate to this.

Step 1: Create a Paid Parental Leave pay item

To assist in keeping track of the payments your business receives from Services Australia and those payments that are disbursed to your employee, we recommend setting up a new expense account – ‘Paid Parental Leave’. At the end of the PPL period, this account should have a nil balance – that is all receipts collected have been paid out to the employee via a salary payment. Creating a separate profit and loss account can assist in keeping track of the payments and ensuring that everything is up to date.
Next, you need to set up the payroll function. To do this you need to create a PPL payroll category (pay item) within the payroll settings. Xero have a pay item option for ‘Parental Leave’. This option should be selected.
The following details should be updated and included within the Paid Parental Leave pay item:

Earnings Name: This should be Paid Parental Leave. This description will show up on your employees’ payslip
Rate Type = Rate per unit
Type of Units = Weeks
Rate per Unit – this is an optional additional detail should you wish to include
Expense Account = Paid Parental Leave (new expense account set up in step 1)

Exempt for Superannuation Guarantee = should be selected
Reportable as W1 on activity statement = should be selected.

Update Employee’s Pay Template: once the pay item is ready, you will need to update your employee’s template to include this pay item. To do this, within the employee’s pay template you need to add an additional earnings line for ‘Paid Parental Leave’.
Weeks: When the Paid Parental Leave earnings line is added, you include the necessary details related to the leave period. For the relevant number of weeks, this refers to the number of weeks in the employee’s normal pay cycle. If the normal pay cycle is fortnightly record 2, if it is monthly record 4.33.
Rate: the rate during this time will depend on your pay cycle and the current PPL amount. Currently, PPL is based on the weekly rate of the national minimum wage of $915.90 per week.

Total: The total payment should be automatically calculated by Xero and reflect a 915.90 per full week of pay due.
Save!

Step 2: Stop leave accrual calculations

In addition, unless you want to voluntarily continue leave accruals, you will want to ensure that no further leave calculations are calculated and accrued for the employee while they are receiving the PPL payments. You should not undertake the following steps until you are running the first payrun that includes PPL amounts, otherwise you may stop leave accruals too soon! Within the employee card in Xero:

Select the ‘Leave’ tab

Scroll down to Leave balances and click on the blue text outlining the employee’s current annual leave entitlements.

Under Leave Calculation Method, select No Calculation Required.

Save!

Important: When the employee returns from leave, you will need to ensure you go back into this area and change back the calculation method for annual leave to ensure accruals commence again. It’s a good idea to set a calendar remind for this one!

Step 3: Process a Paid Parental Leave payrun

At this point, you should be ready to process a payrun for your employee receiving PPL. You have confirmed you have the payment from Services Australia, you have undertaken the above setup steps and you’re ready to go.

Before you process pay, check the following items one last time before finalising and submitting via STP:

Ensure the ‘Ordinary Hours’ earnings line in the payslip has been set to zero hours (to ensure no payroll is calculated)
Ensure a ‘Paid Parental Leave’ pay item has appeared and is calculating the correct payment based on the payroll period and current weekly PPL entitlement

Note any tax mounts withheld as calculated by Xero (you should not need to override this)
Unless you or the individual is contributing above the legislated requirements, ensure no superannuation calculation has been included
Unless you’re planning on contributing to the employee’s leave entitlements, ensure no leave entitlements are being calculated and applied. If any are still showing up revisit Step 2 above to clear them.

If all of the above looks good, you are ready to go, file the payrun and disburse the net amount due to the employee. Good Luck!

* From 1 July 2024, 22 weeks of Paid Parental Leave Pay can be shared by both parents or for single parents they can receive the full amount (so it’s an increase for single parents). The total parental leave pay will then increase by a further 2 weeks each July, until 2026 when it will be 26 weeks).

_{This resource was developed with thanks to Kyah Glasson, Partner, Eagle Financial.}