PAYG tax calculation on unused annual leave

Unused annual leave is taxed differently to an employee's regular pay. Instead of calculating the tax on the lump sum payment of unused annual leave, it's calculated as if the employee had been paid the unused annual leave across a whole year.

If the employee is leaving voluntarily (resignation or reaching retirement age), MYOB works out the PAYG withholding tax on unused annual leave for you when you process a final pay. Otherwise you'll need to calculate it yourself.

How the PAYG Withholding is calculated

1. Calculate PAYG withholding tax on the employee's Normal gross pay using the employee's regular tax table. To work this out yourself, use the ATO's tax withheld calculator.

2. Divide the $ value of the unused annual leave (plus any leave loading) by the number of pay periods in a year. Disregard the cents.

3. Add this amount to the employee's Normal gross pay.

4. Calculate PAYG withholding tax on this value, using the employee's regular tax table.

5. Subtract the PAYG withholding tax amount calculated at step 1.

6. Multiply this by the number of pay periods in a year.

Example

Adrian has voluntarily resigned from his job and has 4 weeks of unused annual leave. His normal gross pay each week is $1000, and he has the tax free threshold tax table assigned. Adrian is also paid 17.5% leave loading on top of his annual leave. This means he's owed $4700 ($4000 annual leave + $700 leave loading).

1. PAYG withholding on normal gross pay = $162

2. Unused annual leave + leave loading ($4700) ÷ 52 = $90

3. Normal gross pay ($1000) + $90 = $1090

4. PAYG withholding on $1090 = $193

5. $193 - $162 = $31

6. $31 x 52 = $1612

The PAYG withholding tax on Adrian's $4700 unused annual leave payment is $1612.

To learn more about calculating tax on unused annual leave, visit the ATO website.