Hi @PayrollMan18,
You're correct to use Schedule 5 for the tax treatment of cashed out annual leave payments for continuing employees. The ATO guidance on withholding from leave payments for continuing employees specifically states that if a continuing employee receives a payment for unused leave, with or without leave loading, you must use the Tax table for back payments, commissions, bonuses and similar payments (Schedule 5).
This applies even though the payment might not seem like a traditional back payment, commission, or bonus. The key factor is that it's a lump sum payment for unused leave being paid out to an employee who is continuing in employment, rather than being taken as actual leave time off.
Your employer's software may be calculating it as part of regular fortnightly gross salary, which would be incorrect for cashed out leave. The correct approach is to treat it separately using Schedule 5's withholding calculation method. This differs from when an employee actually takes annual leave and receives their usual pay, which would be included in normal earnings.
It's worth checking with your payroll software provider to ensure their system can correctly apply Schedule 5 treatment to cashed out annual leave payments. You can find the current Schedule 5 tax table and detailed calculation methods on the ATO website under tax rates and codes.
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