Part 2: Understanding PAYG Withholding, Allowances, and Leave Entitlements
This second part explores essential payroll responsibilities businesses must understand to maintain compliance with Australian taxation and employment law. We will cover registering for PAYG withholding, allowances, various leave entitlements, and reporting obligations clearly and practically, using examples and referencing guidelines from the Australian Taxation Office (ATO).
1. Registering for PAYG Withholding
Definition:
PAYG withholding (Pay As You Go) is the system businesses use to withhold tax from payments made to employees and certain other payees. This ensures tax is collected progressively throughout the financial year, reducing potential tax liabilities at year-end.
Businesses must register for PAYG withholding if they:
- Employ workers (full-time, part-time, casual).
- Have contracts or voluntary agreements to withhold tax.
- Make payments subject to withholding (such as directors’ fees).
The Australian Taxation Office clearly states:
“You must register for PAYG withholding before you’re first required to withhold an amount from a payment.”
(ato.gov.au)
Example:
Emma starts a café and hires two part-time staff. She must register for PAYG withholding before paying her employees their first wages.
2. Reporting PAYG Payments
Employers are required to report withheld amounts to the ATO. This is typically done via two methods:
- Activity Statements (monthly or quarterly): To report total withheld amounts.
- Single Touch Payroll (STP): To report payroll information electronically each payday.
The ATO emphasizes:
“Single Touch Payroll (STP) requires you to report salary and wages, pay as you go (PAYG) withholding and superannuation information to us each time you pay your employees.”
(ato.gov.au)
Example:
ABC Construction pays employees weekly. Each payday, their payroll software automatically sends payment details, including withheld tax, directly to the ATO through STP.
3. Allowances
Definition:
Allowances are payments made to employees to cover specific expenses or as compensation for working conditions (e.g., uniform allowance, travel allowance). Allowances must be correctly classified, as this affects their tax treatment.
Types of Allowances:
- Taxable Allowances: Included in an employee’s assessable income (e.g., overtime meal allowance).
- Non-taxable (or exempt) Allowances: Not subject to withholding (e.g., certain travel allowances at reasonable amounts).
The ATO clarifies:
“Most allowances are taxable and must be included on your employee’s payment summary. However, some allowances may not have tax withheld depending on specific criteria.”
(ato.gov.au)
Example:
Jessica, a salesperson, receives a monthly car allowance of $300. This allowance is taxable and included in her annual payment summary.
4. Annual Leave Entitlements
Definition:
Annual leave (holiday pay) is paid time off work provided to full-time and part-time employees. The minimum entitlement under the Fair Work Act is four weeks of paid leave per year.
Key points for payroll:
- Annual leave accrues progressively based on ordinary hours worked.
- Employees are paid their base rate plus leave loading (if applicable).
The ATO notes:
“Payments for unused annual leave are subject to withholding when an employee leaves your employment.”
(ato.gov.au)
Example:
Tom earns $1,200 weekly and accrues four weeks annual leave each year. Upon taking leave, he receives payment at his normal rate ($1,200 per week), including applicable leave loading.
5. Long Service Leave (LSL)
Definition:
Long Service Leave is additional leave entitlement accrued after extended employment (typically after 7-10 years, depending on state/territory legislation).
Important payroll considerations:
- Each state has unique rules regarding accrual, entitlement, and pay rate.
- Payments for LSL are usually based on ordinary pay rates at the time leave is taken.
- Payments for unused LSL upon termination are taxable and subject to withholding.
The ATO states:
“Long service leave payments made on termination of employment must be included on your employee’s payment summary and have tax withheld.”
(ato.gov.au)
Example:
Rebecca has worked for the same company for 10 years and is entitled to 8.67 weeks of long service leave. When she takes this leave, she is paid at her current weekly salary, with PAYG tax withheld.
6. PAYG Payment Summary Completion
Definition:
PAYG payment summaries (formerly known as “group certificates”) summarise the total payments made to employees and the total tax withheld during the financial year. Single Touch Payroll has largely replaced traditional payment summaries; however, summaries are still relevant for specific situations, such as Employment Termination Payments (ETP)
The ATO explains:
“You must provide your employee with a payment summary if you’re not yet reporting through STP or you made ETP payments.”
(ato.gov.au)
- Information Required:
Employee’s gross earnings (salary, wages, bonuses) - Total tax withheld
- Allowances and any reportable fringe benefits (if applicable)
- Employer’s ABN and employee’s TFN
Example:
Michael leaves his job mid-year and receives an Employment Termination Payment. His employer issues a PAYG payment summary outlining his total earnings, tax withheld, and ETP details.
Summary: Key Points
- PAYG withholding ensures tax is progressively paid, reducing end-of-year tax obligations.
- Single Touch Payroll streamlines reporting obligations to the ATO.
- Allowances can be taxable or exempt depending on their purpose and amount.
- Annual Leave provides employees paid time off and requires payroll attention to leave loading.
- Long Service Leave is state-specific and requires careful calculation and withholding.
- PAYG payment summaries are still required in certain circumstances, especially for termination payments.
Conclusion
Employers must thoroughly understand and fulfill their payroll responsibilities to remain compliant. Proper knowledge of PAYG withholding, reporting methods, allowances, leave entitlements, and payment summaries ensures accurate payroll management, reduces risk, and promotes a positive employment environment.
Always consult official ATO resources or professional advisors for specific guidance.
Information accurate as of March 2025. For updated regulations, always refer to the Australian Taxation Office.
