Withholding Declaration from Unused Leave Payments on Termination of Employment

When an employee leaves their job, they may be entitled to a payment for any unused annual leave. This payment is taxable income, and the employer is required to withhold tax from it. The amount of tax withheld depends on the employee’s taxable income and the type of leave.

The employer must complete a withholding declaration form when they make a payment for unused annual leave. This form tells the Australian Taxation Office (ATO) how much tax has been withheld. The employee must also keep a copy of the withholding declaration form for their records.

Who is Required to Withhold Tax?

The requirement to withhold tax applies to employers, both Australian and foreign, who have employees working in Australia.

Specifically, employers are obligated to withhold tax from payments made for unused annual leave. This means that when an employee receives payment for unused annual leave, the employer is responsible for deducting the applicable tax amount from that payment and remitting it to the ATO on behalf of the employee.

This requirement ensures that the appropriate amount of tax is withheld and paid to the ATO in accordance with Australian tax regulations. It is important for employers to understand and fulfil their obligations regarding tax withholding to maintain compliance with tax laws and fulfil their responsibilities as employers operating within Australia.

How to Calculate the Correct Amount to Withhold

In order to determine the accurate withholding amount for a payment concerning unused annual leave, the following factors must be taken into account:

Portion your payment related to unused annual leave: It is necessary to identify the specific portion of the payment that corresponds to the unused annual leave.
Include any bonus or additional payment related to the leave: If the payment includes any bonus or additional amount tied to the leave, this must be considered separately for accurate withholding calculations.
Mention reason for the payment: It is crucial to determine the purpose behind the payment. Specifically, whether it is made due to early termination of employment, genuine redundancy, invalidity, or as part of an early retirement scheme.
Confirm date of leave accrual: If the payment is not associated with any of the aforementioned reasons, it is important to ascertain the amount related to leave accrued on or after 18 August 1993.

Taking all of these factors into consideration will allow for the precise calculation of the appropriate withholding amount for the payment of unused annual leave.

What are the Tax Rates?

The tax rates for payments related to unused annual leave are the same as the tax rates applied to other types of income. The specific tax rate applicable to an employee’s payment for unused annual leave is determined by their taxable income. The Australian tax system utilises a progressive tax rate structure, which means that higher income levels are subject to higher tax rates.

The current tax rates can vary depending on the specific income thresholds set by the Australian government. It is essential to consult the ATO or a qualified tax professional to obtain the most up-to-date and accurate information regarding the tax rates applicable to different income levels.

This will ensure accurate calculation and withholding of tax from payments for unused annual leave and other types of income.

Taxable Income Rates

For Australian permanent residents, income tax is levied based on a progressive tax rate system, where the tax rates increase as income levels rise.

For Australian Residents

The tax brackets and rates for Australian residents for income tax purposes are as follows:

Income Thresholds	Tax Rate	Tax Payable for this income Bracket
$0 – $18,200	0%	No tax payable
$18,201 – $45,000	19%	19c for each $1 over $18,200
$120,001 – $180,000	37%	$29,467 plus 37c for each $1 over $120,000
$180,001 and over	45%	$51,667 plus 45c for each $1 over $180,000

For Non Residents

The tax brackets and rates for non residents for income tax purposes are as follows:

Income Thresholds	Tax Rate	Tax Payable for this income Bracket
0 – $120,000	32.5%	32.5c for each $1
$120,001 – $180,000	37%	$39,000 plus 37c for each $1 over $120,000
$180,001 and over	45%	$61,200 plus 45c for each $1 over $180,000

How to Calculate the Amount to Withhold

To calculate the appropriate amount of tax to withhold from an employee’s payment for unused annual leave, employers need to follow these steps:

Determine the employee’s taxable income: The taxable income includes not only the payment for unused annual leave but also any other income the employee has earned during the financial year. This includes salary, wages, bonuses, and other taxable benefits.
Find the applicable tax rate: Using the tax table above or the one on the ATO website, locate the section that corresponds to the employee’s taxable income. This section will provide the applicable tax rate or rates.
Calculate the tax to withhold: Apply the relevant tax rates to the employee’s taxable income to determine the amount of tax to be withheld. The tax table provides a step-by-step breakdown to help you calculate this accurately.
Subtract any tax offsets or deductions: If the employee is eligible for any tax offsets or deductions, subtract the amount of these offsets or deductions from the calculated tax to withhold. This will give you the final amount to be withheld.

Tips for Australian Expats and Foreign Investors Living Overseas

Here are some tips for Australian expats and foreign investors living overseas regarding their tax obligations:

Understand your residency status: Your residency status for tax purposes plays a significant role in determining your tax obligations. It’s essential to understand whether you are considered an Australian resident for tax purposes or a non-resident.
Consult the ATO: To clarify your tax obligations and determine if you need to pay tax on payments for unused annual leave, it is advisable to contact the ATO directly. They can provide specific guidance tailored to your situation and help you navigate any reporting or payment requirements.
Seek professional advice: Due to the complexity of international taxation, it is highly recommended to consult with an accountant or tax advisor who specialises in expat or international tax matters. They can provide personalised advice based on your unique circumstances and ensure compliance with tax laws.
Consider tax treaties: Australia has tax treaties with several countries to avoid double taxation. These treaties may impact your tax liabilities, so it’s important to understand if any tax treaties apply to your situation and how they affect your tax obligations.
Maintain proper records: Keep thorough records of your income, expenses, and any relevant documentation to support your tax obligations. This will help you accurately report your financial situation and ensure compliance with tax regulations.
Review local tax laws: Familiarise yourself with the tax laws and regulations of the country in which you are residing. Understanding the tax rules in your host country is crucial to ensure compliance with local requirements and avoid any legal issues.
Plan for retirement and investment: Expats and foreign investors should also consider retirement planning and investment strategies. Depending on your circumstances, there may be specific options or tax-efficient strategies available for optimising your investments and managing your retirement funds.

Withholding Declaration: Seek Professional Advice

The withholding declaration plays a vital role in ensuring accurate tax withholding for payments related to unused annual leave.

By completing this declaration, employers fulfil their obligations to the ATO, helping to determine and withhold the correct amount of tax from employee payments. This process ensures that employees pay the appropriate amount of tax in accordance with their income and tax liabilities.

If you have any questions or concerns regarding the withholding declaration or your tax obligations, we strongly recommend speaking with our expert tax advisor. Our team is well-versed in tax matters and can provide personalised guidance tailored to your specific situation.

By seeking professional advice, you can navigate the complexities of tax regulations, ensure compliance, and optimise your financial well-being. Contact our tax advisor today for comprehensive assistance and peace of mind.

Frequently Asked Questions

What if the employee does not have a Tax File Number (TFN)?

If the employee does not have a TFN, the employer must withhold tax at a higher rate. The higher rate is 47%.

What if the employee has a withholding variation in place?

If the employee has a withholding variation in place, the employer must use the varied withholding rate. The varied withholding rate is the rate that the employee has requested.

What if the employee leaves their job before they have accrued enough annual leave to cover their full entitlement?

If the employee leaves their job before they have accrued enough annual leave to cover their full entitlement, the employer may still be required to make a payment for unused annual leave. The amount of the payment will be based on the employee’s accrued entitlement.

Where can I get more information about withholding declarations?

You can get more information about withholding declarations from the ATO website. The ATO website has a page on withholding declarations that includes information on how to complete the withholding declaration form and how to calculate the amount of tax to withhold.