PAYG Calculation Question

bo2dev Tax

We have questions relating to PAYG and the possible calculation of such for the below situation.

We have an employee who has resigned and given no notice. According to their contract, the employee is required to give 3 months’ notice and if they don not, then they are required to compensate the council similar as defined in the below clause 14.3.2 of their employment contract.

14.3 Payment ln Lieu of Notice

14.3.2 If the “employee” fails to give notice in accordance with this clause, the Local Government may deduct an amount equal to the sum the “employee”n would have earned during the notice period from any moneys held by the Local Government and which otherwise would have been due and payable ton the “employee”.

And as highlighted below in Section 661 of the Workplace Relations Act –

661 Employer to give notice of termination

(4) The required amount of compensation instead of notice must equal or exceed the total of all amounts that, if the employee’s employment had continued until the end of the required period of notice, the employer would have become liable to pay to the employee because of the employment continuing during that period.

(5) That total must be worked out based on:

(a) the employee’s ordinary hours of work (even if they are not standard hours); and

(b) the amounts ordinarily payable to the employee in respect of those hours, including (for example) allowances, loading and penalties; and

(c) any other amounts payable under the employee’s contract of employment.

Our questions are –

    • Is this payment (compensation) to the council subject to PAYG, any other form of eligible termination payment (ETP) or payroll tax or GST?Should we include super such as the national 9.5% in the compensation? I assume we would just raise an invoice to the employee like any other debtor.
    • Do we need to advise the ATO of anything?
    • Anything else we need to be aware of or take into consideration?


Simplistically one could say, if the amount is contractually withheld then there is no payment and no PAYG/Payroll Tax implications.

However, if you go ITAA 1997 sect 6-5(4) ….

“In working out whether you have derived an amount of ordinary income and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.”

It would appear that under the doctrine of “constructive receipt” that as the income has been dealt with on the employee’s behalf, then it has been derived and that PAYG needs to be applied. As soon as there is constructive receipt then it is suggested that payroll tax should be applied to the relevant State Revenue Authority on the assessable amounts involved. The compensation should have been deducted from the former staff member’s NET entitlements.

Regarding super… we note that unused…. annual leave, long service leave, and sick leave are not included in the definition of “ordinary times earnings.” As such there is no need to deduct super.

There is no need to advise the ATO of anything other than to properly deal with the matter in accordance with the doctrine of constructive receipt.

You will of course issue ETP statements to the former staff member and these will be forwarded to the ATO as well.

As there has been no prior taxable supply we do not consider there are any GST implications.