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Edited version of your private ruling
Authorisation Number: 1012537949254
Ruling
Subject: withholding amount
Question
When the entity's employees elect to cash-out annual leave in accordance with the Enterprise Agreement should an amount be withheld from that payment in accordance with Schedule 3 - Pay as you go (PAYG) withholding (NAT 1006)?
Answer
Yes
This ruling applies for the following period
Year ending 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts
Under the entity's Enterprise Agreement employees may elect to cash-out a component of their annual leave balance rather than taking the time off as leave.
When this election is made by employees an additional amount is included in their pay equating to the dollar value of the leave.
After electing to cash-out annual leave the employees continue to work for the entity and are not terminated.
Employees who choose to cash-out some, or all, of their annual leave balance are currently taxed using Schedule 3 - Pay as you go (PAYG) withholding.
Employees are paid on a fortnightly basis.
Relevant legislative provisions
Taxation Administration Act 1953 Section 12-35 of Schedule 1
Taxation Administration Act 1953 Section 15-10 of Schedule 1
Taxation Administration Act 1953 Section 15-25 of Schedule 1
Reasons for decision
Summary
Employees who elect to cash-out annual leave entitlements and continue to work for the entity should have an amount withheld from that payment in accordance with Schedule 3 - Pay as you go (PAYG) withholding (NAT 1006)
Detailed reasoning
Section 12-35 of Schedule 1 of the Taxation Administration Act 1953 (TAA) states an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).
Section 15-10 outlines how much to withhold. Subsection 15-10(1) states in part the amount, that Subdivision 12-B requires to be withheld from a payment, is to be worked out under the withholding schedules made under section 15-25. However, if the regulations prescribe how the amount is to be worked out, then it is to be worked out under the regulations.
According to both Schedule 1 - Pay as you go (PAYG) withholding (NAT 1004) and Schedule 3 - Pay as you go (PAYG) withholding (NAT 1006) holiday pay and long service leave payments must be included as part of normal earnings, except when they are paid on termination of employment.
In this case amounts paid are not covered by the regulations therefore the amount to be withheld is worked out using the withholding schedules. When an election is made to cash-out annual leave employees are not terminated therefore cashed-out annual leave is treated for withholding purposes to be part of normal earnings. Therefore an amount is to be withheld from the payment in accordance with Schedule 3 - Pay as you go (PAYG) withholding (NAT 1006).