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Back payments, commissions, bonuses and similar payments

For payments made on or after 1 October 2016

Withholding limit

There is a withholding limit of 49% on tax withheld from any additional payments calculated using an annualised method.

Applying this withholding limit may result in withholding not being sufficient to cover some employees' end of year tax liability. In these situations, an employee can ask their employer to increase their withholding for the remainder of the financial year.

This document is a withholding schedule made by the Commissioner of Taxation in accordance with sections 15-25 and 15-30 of Schedule 1 to the Taxation Administration Act 1953. It applies to certain withholding payments covered by Subdivisions 12-B (except sections 12-50 and 12-55), 12-C (except sections 12-85 and 12-90) and 12-D of Schedule 1 paid as a lump sum.

Using this table

Use this table if you make a payment of salary or wages, which is:

  • A back payment (including lump sum payments in arrears)
  • A commission
  • A bonus or similar payment.

Other payments you should use this tax table for

These payments include back payments of:

  • Compensation or sickness or accident payments for an incapacity for work that are not tax exempt
  • Australian Government education or training payments - for example, Austudy or ABSTUDY
  • Assessable pensions, benefits and allowances under the Social Security Act 1991 or the Veterans' Entitlements Act 1986, or similar payments made under a law of a foreign country, state or province.

Back payments (including lump sums in arrears)

A back payment is a payment that was meant to have been made in a prior period. For example:

  • Your employee's wages were underpaid due to an error or oversight
  • An allowance you were due to pay in July was overlooked and you made the payment in December.

A back payment is distinct from a bonus, which is a payment made for recognition of performance including past performance. A bonus (or similar payment) can only be considered a back payment if you paid the bonus later than the time that it should have been paid.

If you normally process payments in a pay period later than when the work is performed, for example, overtime payments paid with a time lag of one pay period, they are not considered back payments. These payments are treated as part of the normal pay cycle when paid and withholding is calculated on total earnings for that period. An overtime payment is only considered a back payment if it was meant to have been made in a prior pay period.

Commissions

Commissions are typically payments made as recognition of performance or service, and may be calculated as a percentage of the proceeds from a particular transaction or series of transactions.

Bonuses and similar payments

A bonus is usually made to an employee in recognition of performance or services, and may be calculated as a percentage of the proceeds from a particular business transaction. These payments may not necessarily be related to a particular period of work.

A payment will be treated as similar to a bonus if it is of a one-off nature that does not relate to work performed in a particular period. Examples include:

  • A once-only payment made to a payee as compensation for a changed work location
  • An amount paid as a sign-on bonus to a payee entering a workplace agreement
  • Any lump sum allowance.

Leave loading

Payment of leave loading can also be regarded as a payment similar to a bonus, if it is made as a lump sum and not on a pro rata basis as leave is taken. If you pay leave loading on a pro rata basis, add it to earnings for the period to calculate withholding using the standard tax tables.

Tax file number (TFN) declarations

The answers your employees provide on their Tax file number declaration the amount you need to withhold from their payments. A Tax file number declaration applies to any payments made after you receive the declaration. If you receive an updated declaration from an employee, it will override the previous one.

If an employee does not give you a valid Tax file number declaration within 14 days of starting an employer/employee relationship, you must complete a Tax file number declaration with all available details of the employee and send it to us.

When a TFN has not been provided

You must withhold 49% from any payment you make to a resident employee and 47% from a foreign resident employee (ignoring any cents), if all of the following apply:

  • They have not quoted their TFN
  • They have not claimed an exemption from quoting their TFN
  • They have not advised you that they have applied for a TFN or have made an enquiry with us.

If an employee states at question 1 of the Tax file number declaration they have lodged a Tax file number - application or enquiry for individuals with us, they have 28 days to provide you with their TFN.

If the employee has not given you their TFN within 28 days, you must withhold 49% from any payment you make to a resident employee and 47% from a foreign resident employee (ignoring any cents) unless we tell you not to.

Do not allow for tax offsets or Medicare levy adjustment. Do not withhold any amount for:

  • Higher Education Loan Program (HELP) debts
  • Student Start-up Loan (SSL) debts
  • Trade Support Loan (TSL) debts
  • Financial Supplement debts.

Terms Used

Additional payments

Additional payments include back payments (including lump sum payments in arrears), commissions, bonuses and similar payments.

Normal earnings

Normal earnings are gross taxable earnings and include all salary and wage income, taxable allowances, and overtime earnings for the current financial year. This includes any back payments previously made.

At the start of a financial year, an employee's normal earnings can be based on the last full pay period worked in the previous financial year.

If an employee's pay fluctuates significantly, you can use an average of gross taxable earnings for the current financial year (or, if applicable, the previous financial year).

If an employee has no current or past normal earnings (for example, the employee is newly employed), you can include expected future earnings in your calculations. This can be based on the employee's contracted or expected salary for the financial year.

For the purposes of this table, normal earnings do not include employment termination payments or unused leave payments made on termination of employment.

Average total earnings

Average total earnings are the sum of all normal earnings paid in the current financial year, including current pay, plus any current year back payments if Method B(i) is used to calculate withholding. Then divide the total earnings by the number of pay periods to date (including the current pay period).

Pay periods per financial year

Pay periods per financial year refers to a total of 52 pay periods if paid weekly, 26 pay periods if paid fortnightly or 12 pay periods if paid monthly. No adjustments are required for a 53 week / 27 fortnight year.

Withholding limit

If your employee has a Higher Education Loan Program (HELP), Student Start-up Loan (SSL), Trade Support Loan (TSL) or Financial Supplement debt, see HELP, SSL, TSL, SFSS and additional payments.

If you use Method A or Method B(ii), the amount of tax to be withheld from an additional payment is limited to a maximum of 49% of the additional payment. If the withholding amount calculated (including a HELP, SSL, TSL or Financial Supplement component) using Method A or Method B(ii) exceeds 49% of the additional payment being made, then the amount is reduced to be equal to 49% of that payment. The withholding limit applies to the additional payment only and not to normal earnings for the current pay period.

For some employees, the withholding limit may result in their withholding amounts not being sufficient to cover their end-of-year tax liability, as their total earnings for the financial year may exceed the HELP, SSL, TSL or Financial Supplement repayment threshold or attract a higher rate of tax. Under these circumstances, your employee can arrange an upward variation by entering into an agreement with you to vary the rate or amount of withholding.

Working out the withholding amount

To work out the amount you need to withhold from an additional payment, you must use either Method A or Method B.

Using Method B is more complex but produces a withholding amount that more closely approximates the actual tax payable.

Calculations made using either method are acceptable to work out the withholding amount. If your calculation using either method results in a negative amount, you treat the result as nil.

Using Method A

Use this method for any additional payments made regardless of the financial year the additional payment applies to. This includes all back payments, commissions, bonuses or similar payments.

This method calculates withholding by apportioning additional payments made in the current pay period over the number of pay periods in a financial year, and applying that average amount to the gross earnings in the current pay period.

If you are paying a commission, bonus or similar payment for a defined period of less than 12 months, you can choose to calculate withholding by using the number of pay periods the payment relates to at step 3. For example, if a commission relates to four weeks and the employee is paid weekly, you divide the commission by four pay periods at step 3, rather than 52 pay periods.

Method A instructions
Step Instruction
1 Work out your employee's gross earnings excluding any additional payments for the current pay period. Ignore any cents.
2 Use the relevant tax table to find the amount to be withheld from your employee's gross earnings in step 1.
3 Add any additional payments to be made in the current pay period together and divide the total by the number of pay periods in the financial year (that is, 52 weekly pay periods, 26 fortnightly pay periods or 12 monthly pay periods). Ignore any cents.
4 Add the amount at step 3 to the gross earnings at step 1.
5 Use the relevant tax table to find the amount to be withheld from the amount at step 4.
6 Subtract the amount at step 2 from the amount at step 5.
7 Multiply the amount at step 6 by the number of pay periods used in step 3.
8 Multiply the additional payment being made in the current pay period by 49%.
9 Use the lesser amount of step 7 and step 8 for the withholding on the additional payment. Ignore any cents.
10 Work out the total PAYG withholding for the current pay period by adding the withholding on the additional payment (step 9) to the withholding on the gross earnings (step 2).

Using Method B

Use Method B(i) for any back payments applied to specific periods in the current financial year.

Use Method B(ii) for either:

  • Back payments that relate to a prior financial year
  • Any additional payments (including commissions, bonuses or similar payments) that don't relate to a single pay period regardless of the financial year the additional payment applies to.

If you are making back payments applying to current and previous financial years, apportion the back payment between those years and then use the applicable method for each component to calculate withholding.

If you are making multiple additional payments:

  • In the current pay period, you first need to calculate withholding on the total of any current financial year back payments (including lump sum in arrears) then calculate the withholding on any other additional payments
  • In the current financial year, that is, you made an additional payment to the employee in a previous pay period do not recalculate the withholding for the additional payment previously made.

B(i) Back payments applied to specific periods in the current financial year

This method recalculates withholding for each pay period the back payment applies.

Method B(i) instructions
Step Instruction
1 Work out how much of the back payment applied to each earlier pay period in the current financial year.
2 For the first affected pay period, add the back payment relevant to that period to the normal earnings 1 previously paid to get total earnings for that period.
3 Use the relevant tax table to find the amount to be withheld from the total earnings for that period.
4 Subtract the amount previously withheld for the period from the amount at step 3.
5 Repeat steps 2-4 for each pay period affected. Total the amounts calculated in step 4 for each pay period for the withholding on the back payment.
6 Use the relevant tax table to find the amount to be withheld from your employee's gross earnings (excluding additional payments) for the current pay period.
7 Work out the total PAYG withholding for the current pay period by adding the withholding on the back payment (step 5) to the withholding on the gross earnings (step 6).

B(ii) Additional payments applied over the whole financial year

This method calculates withholding by averaging all additional payments made in the current financial year over the number of pay periods in a financial year, and applying that to the average total earnings to date.

Method B(ii) instructions
Step Instruction
1 Calculate the average total earnings 2 paid to your employee over the current financial year to date. Ignore any cents.
2 Use the relevant tax table to find the amount to be withheld from the average total earnings in step 1.
3 Add all additional payments made in the current financial year if Method B(ii) was used to calculate the withholding, to the additional payment in current pay. Then divide by the number of pay periods in the financial year (that is, 52 weekly pay periods, 26 fortnightly pay periods or 12 monthly pay periods). Ignore any cents.
4 Add the amount at step 3 to the average total earnings at step 1.
5 Use the relevant tax table to find the amount to be withheld from the amount at step 4.
6 Subtract the amount at step 2 from the amount at step 5.
7 Multiply the amount in step 6 by the number of pay periods used in step 3.
8 Subtract any amounts previously withheld from additional payments in the current financial year if Method B(ii) was used, from the amount at step 7.
9 Multiply the additional payment being made in the current pay period by 49%.
10 Use the lesser amount of step 8 and step 9 for the withholding on the additional payment. Ignore any cents.
11 Use the relevant tax table to find the amount to be withheld from your employee's gross earnings (excluding additional payments) for the current pay period.
12 Work out the total PAYG withholding for this pay period by adding the withholding on the additional payment (step 10) to the withholding on the gross earnings (step 11).

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