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Ruling

Subject: PAYG withholding from bonuses and similar payments

Question:

What is the correct amount to withhold from bi-annual performance based bonus payments made to employees?

Advice/Answer:

Withholding to be made in accordance with NAT 7905-9.2004 titled Tax Table for bonuses and similar payments.

Relevant facts:

You pay bi-annual performance based bonus payments to employees.

These bonus payments are based on each employee's performance over the previous 26 weeks and as such, relate to multiple pay periods.

Some employees do not have "normal earnings" for the 26 week period i.e. their pay varies from one pay period to the next.

Assumptions:

Employees in question have earnings for the period in which the bonus is paid

Relevant legislative provisions

Section 15-25 of Schedule 1 to the Taxation Administration Act 1953 (TAA)

Section 15-30 of Schedule 1 to the TAA

Subdivision 12-B (except sections 12-50 and 12-55) of Schedule 1 to the TAA

Subdivision 12-D of Schedule 1 to the TAA

Reasons for decision

Based on the information provided, we have determined that the correct amount to withhold from bonus payments made needs to be worked out according to the step-by step guide provided by Tax Office publication number NAT 7905-9.2004.

Page 1 of this publication provides an explanation of how to calculate the correct amount to withhold from bonus payments which relate to multiple pay periods.

Where the bonus or similar payment relates to a period in excess of one pay period or is paid on an irregular basis, you should work out the correct amount to withhold using the steps below:

Use the relevant tax table to work out the amount to withhold from the payee's normal earnings for one pay period.

Divide the bonus or similar payment by the number of pay periods to which it relates.

Disregard any cents.

Add the amount in step 3 to the normal earnings amount for a single period.

Use the same tax table used in step 1 to determine the amount to withhold on the combined payment amount calculated at step 4.

Subtract the amount worked out in step 1 from the amount worked out in step 5.

Multiply the result by the number of pay periods to which the bonus relates.

In order to fully understand the process above we will work through an example. We will assume that the bonus to be paid to an employee is $1,000. Employee's earnings for the previous 26 weeks vary but we will assume that employee's earnings for the week in which the bonus is paid are $2,000.

Using the relevant tax table to work out the amount to withhold from the payee's normal earnings for one pay period we work out the amount to be $545 (assuming no leave loading). This is worked out using the normal weekly tax table publication NAT 1005-05.2011.

As per your private ruling application, bonus payments relate to 26 weeks' performance, therefore $1,000 bonus is to be divided by 26 which is $38.46.

Disregarding the cents this works out to be $38.

$38 is added to normal earnings for the pay period in which the bonus is paid, which works out to be $2,038.

Using the same tax table as in step 1 the amount to withhold works out to be $560.

Subtract $545 from $560 which is $15.

$15 multiplied by 26 weeks equals $390.

The total amount to be withheld from payments made, including the bonus is therefore $935, which is $545 withholding on normal earnings for the period plus $390 extra to be withheld when the bonus is paid.