Method A: Calculating withholding amounts on lump-sum payments using Method Alump-sum pay

This article outlines the steps involved in calculating the withholding amount (PAYG and STSL) on a lump sum payment when using Method A.  

In accordance with ATO, this method can be used when you are processing any additional payments regardless of the financial year to which the additional payments apply. This will include the following:

1. All back payments
2. Commissions
3. Bonuses, or
4. Similar payments
   
   
   

Calculation of Withholding

Using this method, the withholding will be calculated by:

1. Apportioning additional payments made in the current pay period over the number of pay periods in a financial year, and;
2. Applying that average amount to the gross earnings in the current pay period

To process a lump sum payment for an employee in a pay run using this method, please follow the steps below:

1. Open the Payrun > open the employee payrun
2. Click on Actions > Add Lump Sum payment. An earnings line will appear. (please see the image below)

    3. To proceed, please make sure that the actions enumerated below are completed:

• Make sure to select the Pay Category -Eg: Bonus
• Make sure that the correct location is selected.
• Add any Notes if applicable (This can be optional)
• Enter the Unit/s if it is different from the default value of "1"
• Enter the lump sum Rate/amount
• Make sure to select Method A from the calculation method dropdown

• Enter the number of pay periods the lump sum amount relates to. Please note that the number entered here will be what is used to determine the number of pay periods in the 3rd and 7th steps for Method A calculation as per the ATO guideline.
  
  

    4. If you're done with all the steps above, Save the employee's pay. Once you have saved it, a tooltip will appear at the right of the Method A label. (Please see image below for reference)

    5. By Clicking on the tooltip, a context panel will open containing details of how the withholding amount has been calculated as per the ATO's guidelines.

Interpreting Data in the Context Panel

Each step has a tooltip that explains how each value was determined. You can also export the data in excel or pdf. (Please see image below)

The maximum amount withheld on lump-sum payments

Using Method A, there will be a 47% withholding limit on tax withheld from any lump-sum payments. Thus, you will notice that the final amount withheld will never be higher than the amount calculated in this step. 

When you apply this withholding limit, it may result in withholding not being sufficient to cover some employees' end-of-year tax liability. In these situations, the employees may ask their employer to increase their withholding for the remainder of the financial year. In order to do this, you need to process a PAYG Adjustment in the employee's pay.

Working Holidaymakers and Lump Sum payments

Employees who are defined as "working holidaymakers" are NOT subject to this method when calculating the withholding amount on lump-sum payments.