Payments of unused annual leave on termination of employment are subject to PAYG withholding. You need to know how to calculate the correct withholding and how to complete the employee's payment summary.
Calculate the correct amount to withhold
To calculate the correct amount to be withheld from a payment of unused annual leave, you will need to know:
- how much of the payment relates to unused annual leave
- how much of the payment relates to a bonus or additional payment relating to that leave
- whether or not the payment is being made for early termination of employment
- through genuine redundancy
- through invalidity
- as part of an early retirement scheme
- if the payment is not being made under any of the above, how much of the payment is for leave accrued on or after 18 August 1993.
Next steps:
Genuine redundancy, invalidity or an early retirement scheme
Leaving employment for other reasons
Genuine redundancy, invalidity or an early retirement scheme
A genuine redundancy, invalidity or an early retirement scheme means the following apply:
- The termination time is before the time that retirement or termination would ordinarily have occurred.
- The termination occurs before the employee reached their age pension age.
- You have not been party to any agreement to employ the person later.
See Definitions for more information
Withholding rate
Use Table 1 to work out withholding rates for payments for unused annual leave and leave loading.
Payment type |
Withholding rate |
|---|---|
Annual leave |
32% of the total amount, disregarding any cents |
Leave loading |
32% of the total amount, disregarding any cents |
Example 1: Leaving employment because of invalidity.
Greg is retiring early because of invalidity.
Greg is to be paid a lump sum of $2,260 for unused annual leave and $420 leave loading. Total amount subject to withholding is $2,680.
Amount withheld:
$2,680 × 32% = $857 (disregarding cents)
Completing payment summaries for unused annual leave
This information applies if you make a payment to an employee for unused annual leave on termination of employment because:
- of genuine redundancy
- of invalidity
- they have accepted an offer under an early retirement scheme.
The total amount of the payment (unused annual leave and leave loading, if applicable) is shown at 'Lump Sum A'. The amount withheld from the payment is included with any other withheld amounts at 'Total tax withheld'.
Leaving employment for other reasons
There are payments of unused annual leave made on termination of employment that occur for other reasons such as:
- voluntary resignation
- termination due to inefficiency
- retirement.
You need to:
- calculate the pre-18 August 1993 payment component
- calculate the amount to be withheld
- complete the payment summary.
Calculate the pre-18 August 1993 payment component
Any part of a payment for unused annual leave that accrued before 18 August 1993 has different withholding requirements to payments of unused annual leave accrued on or after this date. You need to calculate the portion (if any) of the payment relating to service before 18 August 1993 using the following formula:
Unused Annual Leave Payment
×
(number of days that accrued before 18 August 1993 ÷ Number of days in total period of service)
The number of days in the total period of service is the number of whole days over which the unused annual leave accrued; assuming that this leave accrued in accordance with the employee's ordinary conditions of employment.
Example 2: Resignation with annual leave accrued before and after 18 August 1993
Helen resigns from her job on 17 September 2014 after 22 years of service and receives a payment of $85,000 for 56 weeks of unused annual leave. Under the conditions of her employment, Helen is entitled to four weeks of annual leave for each year of service.
The total number of days in the accrual period of Helen's unused annual leave is 8,035 days (the period from 18 September 1992 to 17 September 2014).
The number of days in the accrual period that occurred before 18 August 1993 is 334 (from 18 September 1992 to 17 August 1993). Therefore, the component of Helen's payment which accrued before 18 August 1993 is:
$85,000 × (334÷8,035) = $3,533 (disregarding cents).
The component of payment for service on or after 18 August 1993 is:
$85,000 − $3,533 = $81,467.
The amount to be withheld would then be calculated according to the tables.
Example 3: Resignation with annual leave accrued after 18 August 1993
Debbie resigns from her job on 31 October 2014 after 34 years of service and receives a payment of $2,000 for four weeks of unused annual leave. Under the conditions of her employment Debbie is entitled to four weeks annual leave for each year of service. As Debbie has already used most of her annual leave throughout her employment the remaining balance of four weeks annual leave means that the accrual period of Debbie's annual leave is 1 November 2013 to 31 October 2014.
As the whole period is after 18 August 1993, all of Debbie's payment of $2,000 is for service on or after 18 August 1993.
End of exampleCalculate the amount to be withheld
'Leaving employment for other reasons' means that an individual's employment is not being terminated because:
- of genuine redundancy
- of invalidity
- they have accepted an offer under an early retirement scheme.
Use tables 2 and 3 to work out how much tax to withhold for employees who are leaving for other reasons.
Payment type |
Marginal rates calculations |
|---|---|
Annual leave |
Step A Add any leave loading to the annual leave amount. Step B If the total of unused annual leave in respect of service on or after 18 August 1993 is less than $300, withhold 32% of the total amount, disregarding any cents. If the total of unused annual leave is $300 or more:
|
Leave loading |
Add any leave loading to the annual leave amount for calculation of the amount to be withheld. |
Example 4: Resignation
Mark, who resigned on 24 July 2014, is to be paid a lump sum of $4,000 for four weeks of unused annual leave.
Under the conditions of his employment, Mark is entitled to four weeks annual leave per year of service. Mark's normal gross earnings are $1,000 per week.
Mark is not leaving because of genuine redundancy, invalidity, or under an early retirement scheme.
No unused annual leave accrued before 18 August 1993.
The total amount that accrued on or after 18 August 1993 is $4,000.
Step |
Instruction |
Result |
|---|---|---|
1 |
Using the Weekly tax table work out amount to be withheld from normal gross earnings for a single pay period ($1,000.00 per week). |
$183 |
2 |
Divide $4,000.00 by the 52 normal pay periods in one year ($4,000.00 ÷ 52). |
$76.92 |
3 |
Disregard cents in the result. |
$76 |
4 |
Add amount at step 3 to normal gross earnings for a single pay period ($1,000.00 + $76.00). |
$1,076 |
5 |
Using the Weekly tax table calculate the amount to be withheld from the result at step 4. |
$209 |
6 |
Subtract the amount withheld from normal gross earnings from the amount at step 5 ($209.00 − $183.00). |
$26 |
7 |
Multiply the amount at step 6 by the number of normal pay periods in one year ($26.00 × 52). |
$1,352 |
The amount to be withheld from Mark's payment of $4,000 of unused annual leave is $1,352.
End of exampleComplete the payment summary
When you are making a payment of unused annual leave and leave loading on termination of employment, the amount that accrued before 18 August 1993 is shown on the employee's payment summary at 'Lump Sum A’.
Any amounts of unused annual leave and leave loading that accrued on or after 18 August 1993 are included at 'Gross payments' along with any other amounts.
All the amounts that are being withheld are included with other withheld amounts at 'Total tax withheld'.