This article contains the following sections:
PAYG on unused leave
If your leave payout forms 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 7), 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.
If you are paying out long service leave, and there is a pre-16 August 1978 component to the payment, you will need to calculate this manually and add a PAYG adjustment to account for the different rate applicable to this component.
If the payment is as a result of invalidity or early retirement scheme, withholding is also calculated in the same way and reported as lump sum A. As for redundancies, tick the 'Genuine Redundancy' checkbox within the pay run and the 32% flat rate will be applied:
NB: For terminations as a result of invalidity there is no Lump Sum D component on lump sums, so if the termination payment also includes a lump sum payment, you will need to tick ‘Override calculations’ checkbox. Withholding on lump sums is discussed further below.
PAYG on lump sums
Genuine redundancy or early retirement scheme
If the payment is for a genuine redundancy or early retirement scheme and the ‘Genuine Redundancy’ checkbox has been ticked, the system will calculate the Lump Sum D component, which is the tax free amount comprising an annually indexed base amount plus an amount for each complete year served. For the 2021-2022 FY the base limit is $11,341 and the the service amount is $5,672 per complete year served.
For example, Petra started working for Biz Co on 1 July 2016. Petra’s role is made redundant effective 1 September 2021 and satisfies the ATO definition of a genuine redundancy. She is paid a redundancy of $35,000. The tax free limit for 2021-2022 for Petra will be $11,341 + ($5,672 x 5 years), making the Lump Sum D amount a total of $39,701. The whole of Petra’s redundancy payment will therefore be tax free and display in the Termination PAYG calculation context panel under Lump Sum D.
Any amount over the tax free limit will be subject to the ETP cap and have withholding calculated in accordance with Schedule 11. For detailed information, refer to PAYG on Employment Termination Payments – Life Benefits.
For more information generally, see the ATO guide on redundancies and early retirement.
Invalidity
If you ticked the Genuine Redundancy checkbox to process unused leave for a termination due to invalidity, a Lump Sum D component will be calculated. As noted earlier, the tax free limit does not apply for invalidity, so you will need to tick ‘Override calculations’ checkbox and:
- Remove the automatically calculated Lump Sum D component;
- Update the taxable component; and
- Manually calculate and manually enter the PAYG in the ‘Tax withheld’ field
PAYG on the taxable component will be subject to the ETP cap and have withholding calculated in accordance with Schedule 11. For detailed information, refer to PAYG on Employment Termination Payments – Life Benefits.
If you have any questions or feedback, please let us know via support@yourpayroll.com.au