Help me settle a dispute with our payroll staff. Our latest award allows our staff to cash out annual leave. I was provided the option as I have excess annual leave. This is the first time for payroll to action my request. When I got approved to cash out excess annual leave, the payroll deducted a very high amount in a payment separate to my normal pay. I got 2 payslips, one for normal working fortnight and one for a lump sum of 2 weeks annual leave and taxed under Schedule 5. Well it was a huge chunk of tax which does not give me incentive to cash out annual leave while still working! All my other workmates are now not happy about this. I thought I should have been paid as if I was actually taking annual leave. Now I'm being punished for the excess leave? My gross is $2855.01 and tax was $832 under Schedule 5 - why?? that's not my normal wages . I should have just taken the leave!
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Hiya @Ava64 👋
The ATO requires employers to tax cashout of leave in service as a lump sum: marginally.
To summarise marginal tax, it spreads the lump sum over all the pays in the financial year and works out the difference between the tax on what you were paid and the tax you would have paid if you also received a portion every pay instead of a lump sum. That difference is summed up and that's the tax on the lump sum.
For example, a fortnightly amount of 2,558 for an Australian tax resident claiming the tax-free threshold, no STSL or tax offsets is taxed 466 per fortnight. If you had the same pay each fortnight and hadn't received any other marginally taxed payments, then let's assume you cashed out a fortnight's worth of leave. We take the lump sum amount 2,558, divide it by 26 fortnights = 98.38. Now add that amount to your normal gross (= 2,656.38) and look up the fortnightly tax table to see what the tax WOULD be (= 498). Deduct your regular tax of 466 from the higher amount of tax you looked up (= 32). Now multiply that difference by 26 fortnights (= 832). That is the tax on the lump sum.
Deanne
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sorry I meant base wage is only $2558.01 and normally tax is $446 but under Schedule 5 they taxed me $832!!
Hiya @Ava64 👋
The ATO requires employers to tax cashout of leave in service as a lump sum: marginally.
To summarise marginal tax, it spreads the lump sum over all the pays in the financial year and works out the difference between the tax on what you were paid and the tax you would have paid if you also received a portion every pay instead of a lump sum. That difference is summed up and that's the tax on the lump sum.
For example, a fortnightly amount of 2,558 for an Australian tax resident claiming the tax-free threshold, no STSL or tax offsets is taxed 466 per fortnight. If you had the same pay each fortnight and hadn't received any other marginally taxed payments, then let's assume you cashed out a fortnight's worth of leave. We take the lump sum amount 2,558, divide it by 26 fortnights = 98.38. Now add that amount to your normal gross (= 2,656.38) and look up the fortnightly tax table to see what the tax WOULD be (= 498). Deduct your regular tax of 466 from the higher amount of tax you looked up (= 32). Now multiply that difference by 26 fortnights (= 832). That is the tax on the lump sum.
Deanne
Thanks Payroll Deane. I am happy that you explained this better than our Payroll. They quoted Schedule 7 which confused me because they mentioned Schedule 5 so 🤷 but thanks you're a champ.
Marginal tax isn't easy to understand, an example is always better 😉 happy to help. Deanne
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