Tax on Bonuses, Backpays, and Commissions

The ATO has two methods for calculating the tax on back payments, commissions, bonuses, and similar payments:

• Average for Year: The employee's Normal Gross Earnings are worked out based on all the paid pays for the current financial year. This calculation excludes back pays. The value of journals are included in the calculation and are added to an existing pay for the period if there is one, or treated as a pay if there isn't a pay for the period.
• Last Pay: The Normal Gross Earnings use the last paid pay for this employee.

If you're using the Last Pay option, and the pay issued before the bonus, back pay, leave loading, and similar pay is not a standard pay, then the tax calculation is incorrect. If the employee is paid irregular amounts, this option should be set to Average for Year.

Setup required

1. On the Tax Config tab, enter the Schedule 5 PAYG Withholding cap.
2. On the Transaction Type - Tax form, set up a new tax transaction type. This should have a calculation method of Amount, and an effective date. Add this into any applicable tax accumulators on the Configuration tab.
3. On the Transaction Type - Pay form, set up pay transaction types for bonuses. Ensure that there is an effective date.
4. On the Configuration tab select the basis for the calculation of withholding. Options are Full year and Defined no of periods. This transaction type does not get added into the tax accumulators.
5. On the Back Pay Configuration form, select the tax transaction type for tax. This can be the same tax transaction type used for bonuses and commissions.
6. Ensure any new transaction types that you have added have also been included in summary trees and/or payment summary configuration.

• Schedule 5 – Tax table for back payments, commissions, bonuses and similar payments (ATO website)