When you terminate an employee from within the pay run, PAYG is calculated and withheld on the various components which make up the termination pay in accordance with rates and guidelines set out by the ATO.
PAYG is calculated differently for different components, and there are tax free components that may apply. Each part of the total PAYG is displayed in the termination PAYG calculation context panel within the termination pay run, and the calculations for the termination-specific payments are set out.
This article will provide an overview of each of the PAYG calculations you may encounter in a termination pay.
Each payment type is covered in a dedicated section, as follows, with links to more detailed pages:
- Unused leave payouts
- Genuine redundancy, invalidity and early retirement scheme payments
- Employment termination payments - life benefits
- FAQ
Unused leave payouts
This section covers withholding when paying out unused leave which is not classified as an employment termination payment (ETP). Generally this covers annual leave, leave loading and long service leave. For more information on what constitutes an ETP, see the ATO guide on ETP payments.
NB: If you are paying out unused leave not classified as an ETP, you'll need to go to the Payroll settings > Leave categories page and ensure that the ‘Exclude from termination pays’ and ‘ETP’ checkboxes are not checked.
PAYG is calculated according to Schedule 7 and will vary according to the value of the unused leave and whether the payment is made as a result of a genuine redundancy, invalidity or an early retirement scheme.
PAYG on unused leave with a value of less than $300
This includes terminations which are not for a redundancy, invalidity or early retirement scheme, where the post-17 August 1993 leave amount is less than $300.
For detailed information, refer to Calculating PAYG on unused leave with a value of less than $300.
PAYG on unused leave using the marginal rate calculation
For terminations which are not for a redundancy, invalidity or early retirement scheme, if the post-17 August 1993 leave amount is greater than $300, then the marginal rate calculation will apply.
For detailed information, refer to Calculating PAYG on unused leave using the marginal rate calculation.
Unused leave – redundancy, invalidity or early retirement scheme
For leave payouts which form part of a genuine redundancy, invalidity or early retirement scheme payment, a flat rate will apply depending on the type of leave and the period to which it relates.
For detailed information, refer to PAYG on Genuine Redundancy, Invalidity and Early Retirement Scheme Payments.
Unused leave classified as an ETP
If you are paying out leave which is classified as an ETP, this is treated as a Type O payment, with PAYG calculated in accordance with Schedule 11. For more information on what constitutes an ETP, see the ATO guide on ETP payments.
NB: If you are paying out unused leave classified as an ETP, you'll need to go to the Payroll settings > Leave category page, and add a leave category for this purpose, with the ‘ETP’ checkbox checked:
For detailed information, refer to PAYG on Employment Termination Payments – Life Benefits.
For more information on processing Type O payments, see this article.
Genuine redundancy, invalidity and early retirement scheme payments
For more information on withholding on termination payments as a result of redundancy, invalidity or early retirement scheme, refer to PAYG on Genuine Redundancy, Invalidity and Early Retirement Scheme Payments, which has specific details on:
- PAYG on unused leave
- PAYG on lump sums
Employment termination payments - life benefits
Payments classified as an employment termination payment (ETP) are treated differently for tax purposes depending on the particular code they fall within, whether they are paid in the same financial year as the date of termination. ETPs have PAYG withheld in accordance with the Schedule 11 tax table.
For detailed information, refer to PAYG on Employment Termination Payments – Life Benefits.
Other PAYG
Your employee’s termination payment may include normal earnings, for instance, their regular pay for the pay period, or PAYG adjustments added via the ‘Actions’ button in the pay run. PAYG on normal earnings, as well as any PAYG adjustments you have manually added, are displayed under the ‘Other PAYG’ heading in the context panel.
NB: the PAYG calculation on normal earnings is as per the relevant tax tables issued each financial year and the calculation is therefore not exposed.
Total PAYG
At the bottom of the context panel you’ll notice the ‘Total PAYG’ footer – this displays the total PAYG (as you might expect!) which equates to the total of each PAYG component displayed in the context panel and corresponds to the PAYG amount in the employee’s pay run totals in the pay run.
FAQs
PAYG on 'normal' earnings
Your employee’s termination payment may include normal earnings – for instance, their regular pay for the pay period – and PAYG adjustments added via the ‘Actions’ button in the pay run. PAYG on normal earnings, as well as any PAYG adjustments you have manually added, are displayed under the ‘Other PAYG’ heading in the context panel.
NB: the PAYG calculation on normal earnings is as per the relevant tax tables issued each financial year and the calculation is therefore not exposed.
Seasonal workers
Employees engaged in the seasonal worker program and who have the 'Is a seasonal worker (and the business is an approved employer of the SWP)' checkbox ticked in their Tax File Declaration screen are withheld tax at a flat rate of 15% on all payments made to them. This includes any termination payments, such as ETPs or marginal calculations. As such, any termination pay processed for a seasonal worker will override general PAYG calculation rules and instead be calculated at 15%.
Working holiday maker
In regards to PAYG withholding in relation to terminations for working holiday makers, Schedule 15 continues to apply to all payments.