AccountRight Plus, Premier and Enterprise, Australia only
When an employee's employment is terminated, the tax on their unused leave is calculated differently to that of their 'normal gross earnings'. This support note will assist you to calculate and adjust the PAYG on an employee's termination payment.
Learn more about taxation of termination payments on the ATO website.
- For unused leave accrued pre 17 August 1993, please seek assistance from your accountant or the ATO. The PAYG tax deduction calculation for unused leave prior to this date is calculated differently to that outlined in this support note.
- The tax rates and calculations used in this support note are examples only. Please check with your accountant or the ATO for the most up-to-date information applicable to your circumstances.
- See how our Payroll management training course can help you learn how to set up your payroll and process your employee pay runs.
PAYG on unused leave is apportioned over the payroll financial year, and there are a number of calculations that need to be stepped through. The first step is to determine the amount of unused leave owing to the employee. For information on calculating this, see Termination payments (Australia only).
Let's assume that an employee is terminated and their current payroll details are:
- Paid an annual gross salary of $52,000; which equates to $1,000.00 per week.
- Has the Tax Free Threshold selected as their Tax Scale.
- Is owed $3,525.00 of unused holiday leave. This consists of $3,000.00 of unused annual leave, and $525.00 which is leave loading calculated at 17.5%.
Unused leave is taxed as though it was earned in the payroll financial year it is paid, so the correct tax needs to be calculated so it represents a 'true average weekly wage'.
- Divide the total taxable unused leave by 52: $3525.00 / 52=$67.79 (rounded)
- Add result to a normal weeks gross wage: $1,000.00 + $67.79=$1,067.79
- PAYG calculated on $1,067.79 using the 2012-2013 payroll year tax tables (tax free threshold): $201.00.
- Subtract the 'standard' weekly PAYG from the adjusted PAYG to find the difference: $201.00 - $178.00=$23.00.
- Multiply the difference by 52 weeks to find the tax instalment deduction for the unused leave: $23.00 x 52 weeks=$1196.00
If the unused leave is included in the last paycheque, add the PAYG calculated for the unused leave to the PAYG calculated for the normal gross wage. The total of both tax components of this will be the total PAYG deduction for the termination paycheque.
Adjusting the PAYG calculated by your software
The PAYG that is automatically calculated by the software can easily be over-written. Create the termination paycheque and then click on the calculated tax in the Amount field. With the PAYG amount highlighted, enter the amended PAYG amount. Be sure to enter this as a negative figure.
Payment summary reporting
As unused leave is considered 'normal gross earnings', it is reported in the Gross Payments PAYG Payment Summary field. The PAYG tax deduction attributable to unused leave is reported in the Total Tax Withheld field.
- Go to the Payroll command centre and click Print Payment Summaries. Follow the on-screen steps and enter all required information.
- At the fourth step, on the left side of the window click Gross Payments in the Payment Summary Field. On the right side of the window click the Wage Category used to pay the unused leave in the Select Payroll Categories field. This will select the category.
- Scroll down the Payment Summary Field list on the left side of the window and click Total Tax Withheld then click PAYG Withholding so it is selected on the right side of the window.
If an ETP does not have a taxable component it does not need to be selected on the Payment Summary.