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Correct amount of PAYG withheld for back payment of unpaid wages?

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Newbie

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Could I please kindly request help on understanding the amount of PAYG withheld by my previous employer on a lump sum payment for unpaid wages? 

 

The lump sum amount is just over $18k and PAYG withheld was just under $8k. This equates to 45% tax on the lump sum paymentSmiley Sad   

 

(Sorry I'm using rounded amounts, as it's my first time to post on here and wasn't quite sure if I have to keep personal financial details private??)

 

Here is the backgroud details if this helps with determing correct calculation:

I was employed by this employer from January 2017 to January 2019. After advice from the Fair Work Ombudsman, I sent a letter of demand for unpaid wages, entitlements and allowances, totalling just over $18k - yes I couldn't believe how much the total was until FWO informed me! Just today, my previous employer agreed to pay the full claim of $18k, less any taxes payableSmiley Happy

 

However, I was shocked when I received an email late this afternoon, lettting me know that payment is scheduled for next week - attached was a copy of the payslip. To my shock horror, the nett pay I will receive is just over $10k; that's just under $8k in tax / 45% tax rate.  As mentioned, I finished working with this employer back in January this year. I briefly worked for another employer, but left in late June 2019. My income for this financial year to date is $0. I do not plan to return to paid employment for the next 12months or more, so I do not plan on engaging in paid employment. So other than this lump sum payment, I won't be earning any wages or employment income. My previous employer would definitely have my TFN on file and I'm not a foreign tax resident.

 

If someone kindly could confirm whether or not this is the correct amount of PAYG withheld. that would be greatly appreciated.

 

Thanking you in advanceSmiley Happy

 

Kind regards

Machan

 

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Most helpful response

Community Support

Replies 2

Hi @Machan,

 

Welcome to our Community!

 

We can provide general information here and yes, we advise not to provide personal information on our Community as it's a public forum.

 

Your previous employer would be required to withhold tax based on  Schedule 5 - Tax table for back payments, commissions, bonuses and similar payments and use either method A or method B to work out the calculations. Have they provided you any calculations of the payment?

 

Your previous employer would not know that you don't plan on engaging paid employment for this financial year, so would not have been able to take that into consideration. However, if this is your only income for the financial year when you lodge your income tax return, you may be entitled to a refund.

 

Hope this helps, JodieH.

3 REPLIES 3

Most helpful response

Community Support

Replies 2

Hi @Machan,

 

Welcome to our Community!

 

We can provide general information here and yes, we advise not to provide personal information on our Community as it's a public forum.

 

Your previous employer would be required to withhold tax based on  Schedule 5 - Tax table for back payments, commissions, bonuses and similar payments and use either method A or method B to work out the calculations. Have they provided you any calculations of the payment?

 

Your previous employer would not know that you don't plan on engaging paid employment for this financial year, so would not have been able to take that into consideration. However, if this is your only income for the financial year when you lodge your income tax return, you may be entitled to a refund.

 

Hope this helps, JodieH.

Newbie

Replies 1

Hi JodieH

 

Thank you so much for your reply and for the information provided. I called the ATO earlier in the week and after speaking with the advisor for about 30minutes, I came away with no answer or direction. He instead believed it was an ETP payment but then changed his view and said to use the same schedule that you advised, but then changed back to his original view of being an EFT. I wasn't quite sure what to do with that informationSmiley Happy

 

In reply to your response....no, I was just sent a copy of a payslip (wage payment was processed in payroll last Friday, but payment won't be processed into my account until 10th). 

 

I called my previous manager and he said that the lump sum payment was calculated like they normally processed my wages:  the lump sum payment treated as the gross earnings for the fornight payment, so the tax calculated was very high because this rate is based on the assumption that I'm earning this large amount fornightly and therefore have entered into the highest bracket of income and tax rate.  He told me not to worry because I'd probably get most of this tax back come tax time.

 

As tax time is 10 months away, that's a long time to wait. I told him that I'm not in paid employment and won't be earning any other income for this tax year, but he said that he has not option - it is what it is!

 

Could you please let me know if I have no choice but to be taxed at this rate and to wait for tax time?  Should he have withheld the tax based on Schedule 5 - Tax table for back payments, commissions, bonuses and similar payments and use either method A or method B, as you had kindly informed?

 

Kind regards,

Machan

 

I

ATO Certified Response

Community Support

Replies 0

Hi @Machan,

 

Sorry to hear that you've had that experience with us!

 

I think the confusion may have stemmed from the fact that you have ceased working for this employer, and that the payment contained unpaid wages, entitlements and allowances. This is very similar to the nature of an ETP.

 

However, from what you've described, it sounds like this payment was unrelated to the termination of your employment, and you'd have received it regardless of whether or not you had remained with that employer. If this is the case, then I would not imagine that it would be deemed an ETP.

 

It sounds like your former employer has not used Schedule 5 at all, and has just calculated tax at the highest possible rate. If the back payment was related to multiple financial years, then it should have been apportioned between those years and withholding calculated on each financial year separately using Method B(ii).

 

Unfortunately, how your employer calculates the tax to withhold on that amount is really up to them - though we do provide guides and schedules for employers to use, it is ultimately their decision whether or not they use those resources.

 

If they haven't paid you yet then you may be able to have a discussion with them about how they've calculated the withholding, and ask if they could adjust the amount of withholding to a more appropriate amount, using the calculations in Schedule 5. If they agree, this would be the best way for you to get them to potentially reduce the amount of tax that they are withholding.

 

If they have already paid you and remitted the PAYG Withholding to the ATO, then there isn't really much that can be done to correct this. You would have to wait until you have lodged your tax return in order to receive the overtaxed amounts back as a refund.

 

Hope this helps,

 

Rachael B.