Marginal tax is calculated by comparing an employee’s normal earnings and tax within a defined period to what their earnings and tax would have been had the termination amount been paid out as it was earned over the period instead of paid as a lump sum.
PAYG withheld does not include amounts for STSL (study and training support loans).
If the post-17 August 1993 lump sum payment is less than $300, PAYG will calculate as the lesser of marginal tax or 32%.
This is as per the ATO, for more information refer to Work out the Withholding Amount on the ATO link below:
Enter the values
UI
Enter the termination payment via the Termination Modal as per usual.
When editing a pay item produced by the termination modal you will notice the taxable period locked, as Annually.
This will also be locked if adding a marginally taxed termination pay item manually
Calculation
Step | Instruction |
1 | Using the relevant PAYG withholding tax table, work out the amount to withhold from your employee’s normal gross earnings for a regular pay period. |
2 | Divide the amount of the total payment by the number of normal pay periods in 12 months Taxable PeriodMonthlyFortnightlyWeekly Annually122652 |
3 | Ignore any cents. |
4 | Add the amount at step 3 to the normal gross earnings as used from Step 1 |
5 | Use the same PAYG withholding tax tables used at step 1 to work out the amount to withhold for the amount at step 4. |
6 | Subtract the amount at step 1 from the amount at step 5. |
7 | Multiply the amount obtained at step 6 by the number of normal pay periods in 12 months. |
Example
Jason is a salaried employee earning $10,000.33 per month. He terminated on 18/07/2025 and is being paid out his Annual Leave balance of 100hrs @ $60/hr
Termination Date - 18/07/2025
Pay Period - 01/06/2025 - 30/06/2025 (last full pay period)
Step | Answer |
1 | $2,435.00 |
2 | $500.00 |
3 | $500.00 |
4 | $10,500.00 |
5 | $2,596.00 |
6 | $161.00 |
7 | $1,932.00 |
Note: PAYG is calculated on a weekly basis regardless of the Pay Calendar based on the Coefficients supplied by the ATO. Therefore a manual calculation may vary slightly to the calculation in Definitiv.
All best efforts are made to calculate the appropriate amount of PAYG on a non standard pay item however only the information within Definitiv can used, therefore if you disagree with the calculation please manually update.
Messaging
To assist end users with how the PAYG was calculated we have introduced messaging which contains all relevant information:
Marginal PAYG calculated on the payment
Marginal Payment that was entered
Taxable Period that was selected
Current Earnings that were used
Pay Period Dates the current earnings were summed for
Scenario | Message |
Marginal Taxed Termination + Prior earnings found | "Marginal tax of $X.XX was calculated on the marginal payments of $Y.YY over Z months. The earnings of $A.AA for the period DD/MM/YYYY - DD/MM/YYYY was used for calculation." |
Marginal Taxed Termination + No prior period’s earnings found | "No earnings were found for the period DD/MM/YYYY - DD/MM/YYYY when attempting to calculate the marginal tax component of PAYG. Please calculate and enter manually." |
Marginal Taxed Termination + Employee has not provided TFN | "Employee has not provided a TFN. Additional pay on termination taxed at the maximum rate of X%." "Marginal tax of $X.XX was calculated on the marginal payments of $Y.YY over Z months. The earnings of $A.AA for the period DD/MM/YYYY - DD/MM/YYYY was used for calculation." |
Termination pay with unused leave under $300 and taxed at the lower 32%. | "Total of AL, LSL - Post 17 August 1993 and LL Paid on termination did not exceed $300. Marginal tax on total unused leave payments capped at 32%." "Marginal tax of $X.XX was calculated on the marginal payments of $Y.YY over Z months. The earnings of $A.AA for the period DD/MM/YYYY - DD/MM/YYYY was used for calculation." |
Calculation resulted in a negative tax value | "Marginal tax calculation resulted in a negative value, therefore was reduced to $0.00. If required, manually adjust." |
Note: If any adjustments are paid the message will display the final combined amount.
Non Standard Tax Scales
The above is only based on standard tax scales, if your employee is paid on a non standard scale such as Working Holiday Maker please use the relevant Termination Pay items to tax at the appropriate scale.