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Withholding from unused leave payments on termination of employment

When an employee leaves, business owners may be required to withhold from unused leave payments, under the PAYG withholding system.

There are special rules for withholding that apply to payments made to an employee who has not given you a valid TFN, where you withhold tax at a higher rate. If no TFN is provided, withhold 47 per cent from any payment of unused leave to a resident employee or foreign resident employee.

Unused leave payments made after the death of any employee do not require you to withhold tax and you do not show these payments on their payment summary.

Payments of unused annual leave on termination of employment are subject to PAYG withholding.

To calculate the correct amount to be withheld from a payment of unused annual leave, you need to know what the payment is made up of, the reason for the payment, and in some cases when leave was accrued. Payments for leave that had already been taken, but are being made at the time of termination of employment are treated the same way as normal wage payments.

A set rate of withholding applies to payments you make for unused annual leave paid because of genuine redundancy, invalidity or under an early retirement scheme.

Unused annual leave on termination of employment, i.e., when your employee retires, is calculated depending on when the leave was accrued.

Payments of unused long service leave on termination of employment are subject to PAYG withholding. The amount to be withheld from a payment of unused long service leave depends on a number of factors, including key dates, and whether the employee accrued the leave during full-time or part-time service.


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