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How to calculate the amount to be withheld for unused Annual Leave for termatination?

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Newbie

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I find it's very confusing to use the tool in ATO to calculate the amount to be withheld for unused Annual Leave.  The ATO website only shows examples of people who were with the company for 12 months or more but there is no example for employees for who only stay in the company for a few months.

 

How do I work out the amount be be withheld for unused Annual Leave on termatination when an employee only stay for a short time, for example; 2 months? 

Is it pro-rated by the number of months (that he/she worked) when I work out the average Annual Leave Amount or it's a standard 12 months average even though he/she is only employed for a few months.  The Annual leave amount I am referring to is in step 2 and step 7 in the link below.

https://www.ato.gov.au/Forms/Withholding-from-unused-leave-payments-on-termination-of-employment/?an...

 

Many thanks for your help.

Ann

 

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Hi @alooi ,

 

Sorry to hear of the confusion you're experiencing in calculating the amount to withhold.

 

You're using the correct table for working out the withholding rate for unused annual leave amounts accrued on or after 18 August 1993 (table 3).

 

I'll provide a working example that hopefully should help.

 

This scenario will be for an employee that earns $1000 per week gross and they have claimed the tax-free threshold per their TFN declaration. The amount of unused annual leave equates to $350 (more than $300). No leave loading applies to my example.

 

Step A

Add any leave loading to the annual leave amount (doesn't apply to my example)

 

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. (not applicable)

 

If the total of unused annual leave is $300 or more:


1.using the relevant PAYG withholding tax tables, work out the amount to withhold from the employee's normal gross earnings for a regular pay period (for example, weekly, fortnightly or monthly): $183


2.divide the post-17 August 1993 leave amount by the number of normal pay periods in 12 months (for example, 12 monthly payments, 26 fortnightly payments or 52 weekly payments): $350 / 52 = $6.73


3.disregard any cents for the amount calculated at step 2: $6


4.add the amount at step 3. to the normal gross earnings for a single pay period: $1000 + $6 = $1006


5.use the PAYG withholding tax tables used at step 1. to work out the amount to withhold from the amount calculated at step 4: $185


6.subtract the amount calculated at step 1. from the amount calculated at step 5: $185 - $183 = $2


7. multiply the result from step 6. by the number of normal pay periods in 12 months to obtain the amount to withhold from the unused annual leave amount. $2 x 52 = $104

 

So based on my example the amount to withhold from the $350 unused annual leave is $104.

 

This formula works regardless of the duration an employee was with you. Steps 2 and 7 work because it's on the amount of unused annual leave. Don't adjust the normal pay periods in a year (eg 12 monthly payments, 26 fortnightly payments or 52 weekly payments).

 

The figure to use is unused annual leave (the unused annual leave entitlement that the employee has accrued through the duration of their employment) not an average annual leave amount.

 

Annual leave accumulates from the first day of employment gradually through the year (or duration of employment). If you think a mistake has been made with how you're calculating their entitlement please refer to Fair Work for help

 

I hope this helps,

JasonT

3 REPLIES 3
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Most helpful response

Community Support

Replies 2

Hi @alooi ,

 

Sorry to hear of the confusion you're experiencing in calculating the amount to withhold.

 

You're using the correct table for working out the withholding rate for unused annual leave amounts accrued on or after 18 August 1993 (table 3).

 

I'll provide a working example that hopefully should help.

 

This scenario will be for an employee that earns $1000 per week gross and they have claimed the tax-free threshold per their TFN declaration. The amount of unused annual leave equates to $350 (more than $300). No leave loading applies to my example.

 

Step A

Add any leave loading to the annual leave amount (doesn't apply to my example)

 

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. (not applicable)

 

If the total of unused annual leave is $300 or more:


1.using the relevant PAYG withholding tax tables, work out the amount to withhold from the employee's normal gross earnings for a regular pay period (for example, weekly, fortnightly or monthly): $183


2.divide the post-17 August 1993 leave amount by the number of normal pay periods in 12 months (for example, 12 monthly payments, 26 fortnightly payments or 52 weekly payments): $350 / 52 = $6.73


3.disregard any cents for the amount calculated at step 2: $6


4.add the amount at step 3. to the normal gross earnings for a single pay period: $1000 + $6 = $1006


5.use the PAYG withholding tax tables used at step 1. to work out the amount to withhold from the amount calculated at step 4: $185


6.subtract the amount calculated at step 1. from the amount calculated at step 5: $185 - $183 = $2


7. multiply the result from step 6. by the number of normal pay periods in 12 months to obtain the amount to withhold from the unused annual leave amount. $2 x 52 = $104

 

So based on my example the amount to withhold from the $350 unused annual leave is $104.

 

This formula works regardless of the duration an employee was with you. Steps 2 and 7 work because it's on the amount of unused annual leave. Don't adjust the normal pay periods in a year (eg 12 monthly payments, 26 fortnightly payments or 52 weekly payments).

 

The figure to use is unused annual leave (the unused annual leave entitlement that the employee has accrued through the duration of their employment) not an average annual leave amount.

 

Annual leave accumulates from the first day of employment gradually through the year (or duration of employment). If you think a mistake has been made with how you're calculating their entitlement please refer to Fair Work for help

 

I hope this helps,

JasonT

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Newbie

Replies 1

Hi Jason,

 

Thank you for your help.

 

Just yo clarify your quote below, you meant even though the employee only been with us for 2 months, we still use the normal pay period (12 monthly payments, 26 weekly payments or 52 weekly payments to work out his the amount of unused annual leave NOT pro-rated?

 

"This formula works regardless of the duration an employee was with you. Steps 2 and 7 work because it's on the amount of unused annual leave. Don't adjust the normal pay periods in a year (eg 12 monthly payments, 26 fortnightly payments or 52 weekly payments)."

 

Thanks.

Anne

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Community Support

Replies 0

Hi @alooi

 

Correct you still use the normal pay period

 

Thanks, Ari