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Business Tax Tips – Tax on unused annual & long service leave on termination

Business Tax Tips – Tax on unused annual & long service leave on termination

Business Tax Tips – Tax on unused annual & long service leave on termination

The tax on unused annual & long service leave on termination needs to be carefully determined to ensure compliance. The ATO explains what applies at Schedule 7 – Tax table for unused leave payments on termination of employment. Here is some of the info on that ATO page –

For payments made on or after 1 July 2015

This document is a withholding schedule made by the Commissioner of Taxation in accordance with sections 15-25 and 15-30 of Schedule 1 to the Taxation Administration Act 1953 (TAA). It applies to withholding payments covered by section 12-90 of Schedule 1 to the TAA.

Using this table

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 leav
      • 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.

tax on leave annual

tax on leave long service

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).

NOTE – 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

The following example uses the Weekly tax table (NAT 1005) effective from 1 July 2015.

Beth retires on 31 December 2015. She qualified for long service leave after 10 years of service, with further leave accruing on each completed year of service.

She is not leaving because of genuine redundancy, invalidity or under an early retirement scheme.

This week Beth also receives her normal weekly earnings of $800. She has quoted her TFN and has claimed the tax-free threshold. Therefore, the amount withheld is calculated using column 2 of the Weekly tax table.

Details of payment for long service leave

Pre-16 August 1978 component = $3,690.00

16 August 1978 to 17 August 1993 component = $7,700.00

Post-17 August 1993 component = $10,890.00

Amounts to be withheld

Pre–16 August 1978 component subject to withholding

= $3,690.00 × 5% = $184.50

The marginal rate calculation is used to work out the amount to be withheld from the pre-16 August 1978 component.

16 August 1978 to 17 August 1993 component

= $7,700.00 × 32% = $2,464.00

The post-17 August 1993 component of $10,890.00 is also to be withheld at the marginal rate. To simplify the marginal rate calculation for this employee, the pre-16 August 1978 component and the post-17 August 1993 component are added together first: $184.50 + $10,890.00 = $11,074.50

Now apply the marginal rate calculation to the sum of the two components.

Step Instruction Result
1 Amounts to be withheld from normal gross earnings ($800) $113
2 Divide the amount of the payment by the number of normal pay periods in 12 months ($11,074.50/52) $212.97
3 Disregard any cents $212
4 Add the amount at step 3 to normal gross earnings for a single pay period ($800 + $212) $1,012
5 Work out the amount to be withheld from the amount at step 4 ($1,012) $187
6 Subtract the amount at step 1 from the amount at step 5 ($187 – $113) $74
7 Multiply the amount at step 6 by the number of normal pay periods in 12 months ($74 x 52) $3,848

The amount to be withheld from the three components of Beth’s unused long service leave payments is $6,312 ($2,464 + $3,848).

The total amount to be withheld is then $6,425 ($113 withholding from normal earnings plus $6,312 withholding from long service leave).

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.

For more information see HERE

Need help? Not sure? Call for FREE 30min advice / strategy session today! 0407 361 596 Aust

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You also get FREE 30 min to assist in setting up your company in the software, and FREE ongoing email or phone support – no-one offers as much! Call and you also get FREE “Avoid these GST mistakes” – There’s 18 that the Tax Office see regularly – Get them right!

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MYOB – Tax Tables for 2016 – 2017?

The new tax tables for 2016-2017, have mainly changed in the level $37001 – $$87,000 (was $80,000) range. The full levels are –Pers Tax Rates 16-17

Does your MYOB software have out of date tax tables, or you know you need them by experience every year. (To find what you have, click Set Up then General Payroll Information. In about the middle is the table date at the start of that tax year it applies to).

Tax tables become out of date nearly each year as tax rates and/or Medicare and HECS thresholds can be changed by the Tax Office (ATO). MYOB only supply new tax tables via full software annual subscription. You can no-longer buy the  latest tax tables separately as many years ago. Users must upgrade to a new version or take out Cover under their support program to receive the latest tables or ‘pay2myob.bin’ file for earlier versions (MYOB) to keep payroll compliant. (If you want assistance to upgrade to the latest MYOB call Paul – 0407 361 596 or email us – info@accountkeepingplus.com.au).

The special MYOB tax file (eg ‘pay2myob.bin’) has been specially formatted so that it disallows any manual edit it. Additionally, each version is formatted specially, so you can’t use a tax file formatted for MYOB Version 19 with say Version 16. For the Mac version (AccountEdge®) the tax table file is called “MYOB Tax Tables” or in v9 to 9.6 has a “.tax” extension. Everything else though is the same and all the comments here apply equally to the Mac version.

Note third-party tax tables cannot be used in MYOB 2011 onwards – you MUST have subscription or upgrade. Contact us to discuss your needs, or assistance with upgrades and get our extra BONUSES no obligation. 0407 361 596.

There is a Solution up to MYOB v19.11 and Account Edge 14.5 – Third party updated tax tables available for $67+GST provide a substitute, have been tested by ourselves and work with many prior versions. They are for those who want to continue to use their current versions of MYOB® without the need to upgrade. Note that there is nothing in your license agreement that prevents you using 3rd party tax tables.

Installation is simple. The tables are supplied with easy to follow video and instructions and instantly downloaded after secure credit card  payment in most instances, or will be emailed to you. You also receive a PDF copy of the applicable Aust Tax Office Weekly Tax Table for you to check the accuracy of the calculations. After-sales email support is available for any installation or setup issues you may encounter. If you would like Account Keeping Plus to install for you, we can do by remote desktop – Teamviewer (free software). For $50+GST. Call or email for instructions.

Note – NO changes are made to the software. The only changes made are to the tax rates in your company data file that the software calls upon to calculate PAYG Withholding in a pay, when processing payroll. The changes made are not permanent and can be reversed by reloading the tax tables from your current tax table file, simply moving a file in the software folder

These third-party tables are available, which Account Keeping Plus have tested in the software and tested against the ATO tables and work perfectly for us and our clients. To get more details and purchase for your MYOB – click the grey box to the right – “Tax Tables

Need help? Not sure? Call for FREE 30min advice / strategy session today!

Call 0407 361 596 Aust and also get FREE “Avoid these GST mistakes” – There’s 18 that the Tax Office see regularly – Get them right!

Email info@accountkeepingplus.com.au or call 0407 361 596 Australia