Articles Blog
Business Tax Tip – Tax rates on terminations for unused annual & long service leave
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Published on Thursday, 16 February 2023 10:18
When staff leave, the tax rates on unused annual & long service leave needs to be carefully calculated to ensure compliance. Here is some of the info on that ATO page -
Using this schedule
You should use this table if you pay an amount to an employee for unused leave on the termination of their employment or office.
Unused leave payments on termination of employment or office include:
- Annual leave;
- Holiday pay;
- Leave loading;
- Leave bonuses;
- Long service leave.
NOTE - Before calculating the amount to be withheld, you must work out if the payments are being made as a result of a genuine redundancy, invalidity or an early retirement scheme.
For more information, refer to Withholding from unused leave payments on termination of employment.
Working out the withholding amount – depends if TFN provided
1 When a TFN is provided
The amount to withhold is calculated using the table below.
If the post-17 August 1993 lump sum payment from normal termination is less than $300, you must withhold the lesser of the following:
- The amount worked out using the table below;
- 32% of the payment.
Rounding of withholding amounts
Withholding amounts calculated by applying this table are rounded to the nearest dollar. Results ending in 50 cents or higher are rounded upwards. If a TFN is not provided, ignore cents when calculating withholding amounts.
Marginal rate calculation
To work out the marginal rate, you must:
- Using the relevant PAYG withholding tax table, work out the amount to withhold from your employee’s normal gross earnings for a regular pay period;
- Divide the amount of the payment by the number of normal pay periods in 12 months (12 monthly payments, 26 fortnightly payments or 52 weekly payments);
- Ignore any cents;
- Add the amount at step 3 to the normal gross earnings for a single pay period;
- Use the same PAYG withholding tax tables used at step 1 to work out the amount to withhold for the amount at step 4;
- Subtract the amount at step 1 from the amount at step 5;
- 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).
Do not withhold any amount for:
- Higher Education Loan Program (HELP) debts;
- Trade Support Loan (TSL) debts;
- Financial Supplement debts.
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, we will accept an average of gross taxable earnings for the financial year to date over the number of pays received.
Example is given
2 When a TFN has not been provided
If your employee who is receiving the unused leave payments has not provided you with their TFN before the payment is made, you must withhold 49% from the payment.
If your employee is a foreign resident who has not provided you with their TFN, you must withhold 47% from the payment.
NOTE - If your employee believes that for their circumstances the amount you withhold will be too much, they may apply for a variation to reduce the amount of withholding.
For more information refer to PAYG withholding – varying your PAYG withholding.
NOTE - QC 46069 contains precisely the same content as QC 45606, which is Schedule 7 – Tax table for unused leave payments on termination of employment.
The ATO explains at Schedule 7 – Tax table for unused leave payments on termination of employment.
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