BACKPAY – THE INS AND OUTS

How is it taxed?
Where does it go on a payment summary?
Is it superable?
It is taxed using the ATO’s tax table for Backpay, bonuses, commissions and similar
payments. You will use either Method A or B.
The method for marginal rates tax is shown below:
1. Use the Tax Tables to work out the amount to withhold on the average weekly
taxable pay.
2. Divide the lump sum payment by the number of pays in a year. (52 wks, 26 fns or
12 mths)
3. Disregard any cents e.g. $1.75 becomes $1. (Note: If the result is nil, there is no
payg amount to withhold and there is no need to go to the remaining steps).

4. Add the amount in Step 3 to the average weekly taxable pay.
5. Use the Tax Tables to determine the amount to withhold on the
combined payment.
6. Subtract the amount determined in Step 1 from the amount
determined in Step 5.
7. Multiply the result by the number of pay periods in a year. This
is the tax to withhold.
If you are taxing a bonus, backpay etc you do the above 7 steps for
marginal tax and then two more steps, this is known as Method A
Put the 7 step tax aside and then do the following 2 steps:
8. Apply 49% to the bonus
9. Compare the two taxes at steps 7 and 8 and use the lower
amount
Superannuation:
Any part of the backpay that was normally superable, such as
normal pay, remains superable. Any part of the backpay that was
for overtime remains non superable. The super rules don’t change
just because it’s a back pay.
Payment Summary:
Any backpay that is more than 12 months old at time of payment
AND more than $400 goes into Lump Sum E unless it is an “other”
amount. Any backpay that is less than 12 months old just goes
into normal gross payment.
For “other” amounts, the Lump Sum E rule is different, any
backpay that belongs to a previous tax year And is more than $400
goes into Lump Sum E.
“Other” amounts are payments for the following:
• Workers compensation
• Salary continuance
• Accident pay
For any amounts that have gone into Lump Sum E you need to
write a letter breaking down the gross amounts into the various
tax years. Give a copy to the employee to assist them complete
their tax return.