PAYG amounts are calculated on leave payouts using the guidelines set out by the ATO here.
Once you have chosen to terminate an employee from within the pay run there are two methods for calculating the withholding amount when paying out unused leave that has accrued on or after 18th August 1993. The methods used depend on the value of the unused leave:
- Where the value of unused leave is less than $300, withhold 32% and disregard any cents. Refer to this article for further details on this method.
- Where the value of unused leave is $300 or more, PAYG is calculated using marginal tax rates. This article will discuss this method in more detail.
To help clarify, here's an example with calculations:
Phillip is a part time employee earning $40.48583 per hour who works a different number of hours each week. This week he is due to be paid for working 30 hours plus his termination pay, which consists of 101.07288 hours of annual leave plus annual leave loading. Phillip is also an Australian resident claiming the tax free threshold.
To work out the total PAYG withheld from this pay:
- Work out the normal PAYG amount on Phillip's non-termination gross pay (being, 30 hrs x $40.48583 = $1214.57). PAYG on $1214.57 = $257
- Determine Phillip's 'normal gross earnings'. Normal gross earnings are all payments, except those relating to termination payments, received in the last full pay period of employment. This includes taxable allowances, overtime and bonuses. Therefore, your employee’s normal gross earnings should be taken to be the earnings relating to the last full pay period worked. Where your employee’s pay fluctuates significantly over a number of pay periods, the ATO accept an average of gross taxable earnings for the financial year to date over the number of pays received (NB. unscheduled or ad hoc pay runs are counted). The average earnings method is how we calculate the employee's normal gross earnings. Over the financial year, Phillip has earned $4,663.97 over 4 pay periods, averaging his earnings to $1165.99.
- Work out Phillip's gross termination leave pay out amount: (101.07288 annual leave hours x $40.48583) + (101.07288 x $7.09 annual leave loading rate) =$4,947.69. Please note, any other payout deemed to be ETP will not be used in the formula detailed in the next steps. Refer to the section Payments for ETPs at the end of this article.
- Using the steps in the ATO's Marginal Rate Calculation:
- Calculate the PAYG on the employee's normal gross earnings of $1165.99 = $240
- Divide the total gross termination payout by the number of normal pay periods in 12 months ($4,947.69/52 weeks = $95.15)
- Ignore any cents: $95
- Add the amount at step 3 to the normal gross earnings:$1165.99 + $95 = $1260.99
- Use the same PAYG withholding tax tables used at step 1 to work out the amount to withhold from the amount at step 4 = $273
- Subtract the amount at step 1 from the amount at step 5 ($273 - $240) = $33
- Multiply the amount obtained at step 6 by the number of normal pay periods in 12 months (12 monthly payments, 26 fortnightly payments or 52 weekly payments): $33 x 52 = $1716
- Take the normal PAYG amount from this pay run and add it to the PAYG for the annual leave payout: $257 + $1716 = $1973
The above calculations can be viewed when clicking on the "?" icon in the employee's PAYG field:
Overriding an employee's 'normal gross earnings'
We have explained further above how an employee's normal gross earnings are calculated within the system. If you want to override this calculated amount and enter a different amount, you can do this by clicking on "Override normal gross earnings". This will unlock the field, allowing you to then enter your desired amount:
Upon clicking "Save", the termination pay will automatically recalculate based on the new normal gross earnings amount.
N.B. There may be circumstances where the termination PAYG amount does not change from the initial amount. This is simply because the difference between the initial and updated normal gross earnings figure is not sufficient enough to change the amount.
Payments for ETPs
N.B. The Marginal Tax Rate Calculations context panel that we discuss in this article do not relate to termination components that are deemed ETPs. Although we automatically calculate the tax for ETP amounts in the pay run, these figures are not detailed in the context panel.
If your leave payouts form part of a genuine redundancy employment termination payment, we will apply a tax rate of 32% to those payments (as per the ATO tax schedule referenced above) as well as allocating them to a pay category that will be reported as a "Lump Sum A" value on the employee's income statement.
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