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Edited version of your private ruling
Authorisation Number: 1012593976344
Ruling
Subject: PAYG withholding - cashed out annual leave
Question 1
When you make a payment of salary or wages that includes an additional amount for cashed out annual leave should the amount withheld from the payment be worked out using Schedule 3 - Pay as you go (PAYG) withholding (NAT 1006)?
Answer
No.
Question 2
When you make a payment of salary or wages that includes an additional amount for cashed out annual leave should the amount withheld from the payment be worked out using Schedule 30 - Pay as you go (PAYG) withholding (NAT 3348)?
Answer
Yes.
This ruling applies for the following period
Year ending 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts and circumstances
Your employees may elect to cash out a component of their annual leave balance rather than using the leave.
When this election is made an additional payment is included in the employees' fortnightly pay equating to the dollar value of the leave.
After electing to cash out annual leave the employees continue to work for you and are not terminated.
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
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 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)).
The amount required to be withheld from a payment made under section 12-35 of Schedule 1 to the TAA is worked out using the withholding schedules made by the Commissioner under section 15-25 of Schedule 1 to the TAA (subsection 15-10(1) of Schedule 1 to the TAA).
Where a continuing employee takes annual leave and is paid holiday pay in lieu of their normal salary or wages the holiday pay is included in the employee's normal earnings for that period. The amount withheld from a payment of holiday pay made to an employee who takes annual leave (and is paid on a fortnightly basis) is worked out using Schedule 3 - Pay as you go (PAYG) withholding (NAT 1006).
However, when an employee cashes out all or part of their annual leave entitlement rather than take the leave, the payment does not form part of the employee's normal earnings. The lump sum payment for cashed out annual leave is not paid to the employee on a regular fortnightly basis and does not relate to work performed in a particular period; rather, the payment is of a one-off nature and is similar to a yearly bonus paid to employees.
As such, when you make a payment of salary or wages that includes an additional amount for cashed out annual leave the amount withheld from the payment should be worked out using Schedule 30 - Pay as you go (PAYG) withholding (NAT 3348)