Understanding Retroactive Tax Processing

Global Payroll for Australia provides payroll rules and elements to calculate taxes on additional payments that are granted retroactively. An additional payment can include a:

  • back payment (including lump sum payments in arrears)

  • commission

  • bonus or similar payment.

In this section we discuss the retroactive tax calculation methods, the key PeopleSoft delivered elements used to calculate retroactive taxes, and the inputs that users must make to ensure correct retroactive tax processing.

There are two methods to work out the amount to withhold from an additional payment:

  • Method A – uses simple calculations, more suited to employers who have to calculate withholding amounts manually.

  • Method B (i and ii) – uses complex calculations and is best suited to employers who use computer based payroll systems.

The PeopleSoft system uses Method B, as it calculates the withholding amounts with better accuracy when compared to Method A.

Method B (i) – Calculating Taxes to Withhold for Additional Payments That Apply to Specific Periods in the Current Financial Year

To calculate the Marginal, HELP, and SFSS tax amounts to withhold from an additional payment accrued in the same financial year, Global Payroll for Australia uses the following formulas:

Tax

Formula

Marginal Tax

TAX FM MARGINAL calculates Marginal Tax. The formula has a Post Process Formula TAX FM PST MRG TAX to store the tax on RETRO CY, which in turn is accumulated for tax on back payment calculation.

HELP

The post process formula TAX FM PST HELP calculates HELP on retro from the current year.

SFSS

The post process formula TAX FM PST SFSS calculates HELP on retro from the current year.

The system determines how much of the payment accrued in each prior pay period. After calculating the correct amount, it adds this amount to the other payments made in each of the prior pay periods to calculate the withholding tax, as described here:

  1. Calculate the additional payment applied to each earlier pay period in the current financial year.

  2. For the first affected pay period, add the additional payment relevant to that period to the normal earnings previously paid to get total earnings for that period.

  3. Use the relevant tax table to find the amount to be withheld from the total earnings for that period.

  4. Subtract the amount previously withheld for the period from the amount at step 3.

  5. Repeat steps 2–4 for each pay period affected. Add the amounts calculated in step 4 for each pay period for the withholding on the additional payment.

  6. Use the same tax table to find the amount to be withheld from the payee’s gross earnings (excluding additional payments) for the current pay period.

  7. Calculate the total PAYG withholding for the current pay period by adding the withholding on the additional payment (step 5) to the withholding on the gross earnings (step 6).

Note: In Method B (i), additional payments primarily refer to back payments that were supposed to have been paid in a prior period. Hence a bonus can be part of such additional payments only if such bonus was intended to be paid in a prior period.

Method B (ii) – Calculating Taxes to Withhold for Additional Payments That Apply to Previous Financial Years

To calculate the periodic tax, HELP and SFSS taxes to withhold for additional payments that apply to previous financial years, Global Payroll for Australia uses the formulas:

Tax

Formula

Periodic Tax

Formula TAX FM PERIODIC calculates tax on the total of the followings: RETRO PY (back payments related to previous year), RETRO12MTH (back payments from prior fiscal years and before 12 months from the payment date).

HELP

Formula TAX FM HELP is used to calculate the amount on normal earnings, plus back payments relating to the current financial year. TAX FM PST HELP is used to calculate HELP on back payments.

SFSS

Formula TAX FM SFSS is used to calculate the amount on normal earnings, plus back payments relating to the current financial year. TAX FM PST SFSS is used to calculate SFSS on back payments.

Using this method, the system calculates withholding by averaging all additional payments made in the current financial year over the number of pay periods in a year, and applying that to the average total earnings to date.

  1. Calculate the average total earnings paid to the payee over the current financial year to date. Ignore any cents.

  2. Use the relevant tax table to find the amount to be withheld from the average total earnings in step 1.

  3. Add all additional payments made in current financial year where Method B (ii) was used to calculate the withholding, to the additional payment in current pay. Then divide by the number of pay periods in the year (that is, 52 weekly pay periods, 26 fortnightly pay periods or 12 monthly pay periods). Ignore any cents.

  4. Add the amount at step 3 to the average total earnings at step 1.

  5. Use the relevant tax table to find the amount to be withheld from the amount at step 4.

  6. Subtract the amount at step 2 from the amount at step 5.

  7. Multiply the amount in step 6 by the number of pay periods used in step 3.

  8. Subtract any amounts previously withheld from additional payments in the current financial year where Method B (ii) was used, from the amount at step 7.

  9. Multiply the additional payment being made in the current pay period by 47%.

    Note: There is a withholding limit of 47% on additional earnings when the total withholding is applied to additional earnings. (The withholding limit is set by the Australian Tax Office and is subject to change. The rate at the time this document was prepared was 47%.) When calculating withholding such a limit can be applied to any of the withholding elements. By default, the system executes the withholding elements in the following sequence: HELP, SFSS, PERIODIC TAX (PAYG).

  10. Use the lesser amount of Step 8 and Step 9 for the withholding on the additional payment. Ignore any cents.

  11. Use the relevant tax table to find the amount to be withheld from the payee’s gross earnings (excluding additional payments) for the current pay period.

  12. Calculate the total PAYG withholding for this pay period by adding the withholding on the additional payment (step 10) to the withholding on the gross earnings (step 11).

Note: The system uses Method B (ii) for back payments that relate to a prior financial year, and bonuses, commissions or other additional payments that do not relate to a single pay period.

The PeopleSoft system uses the Method B (i and ii) to manage the following tax situations:

  • Method B (i) - Taxes owed on multiple additional payments in the current pay period. This includes marginal tax, HELP, and SFSS.

  • Method B (ii) - Taxes owed on multiple additional payments in the previous financial years. This includes periodic tax, HELP, and SFSS.

Key Elements Used for Retroactive Tax Processing of Salaries and Wages Additional Payments Following Method B (i) and Method B (ii)

Element

Element Type

Use

MARGINAL TAX

Deduction

This element calculates the marginal tax.

HELP

Deduction

This element calculates the HELP tax.

SFSS

Deduction

This element calculates the SFSS tax.

TAX FM MARGINAL

Formula

This element is used by the deduction MARGINAL TAX to calculate the marginal tax.

TAX FM HELP

Formula

This element is used by the deduction HELP to calculate the HELP tax.

TAX FM SFSS

Formula

This element is used by the deduction SFSS to calculate the SFSS tax.

PERIODIC TAX

Deduction

This element calculates the periodic tax.

TAX FM PERIODIC

Formula

This element is used by the deduction PERIODIC TAX to calculate the periodic tax.

This element calculates tax on the total of the followings: RETRO PY (back payments related to previous year), RETRO12MTH (back payments from prior fiscal years and before 12 months from the payment date).

TAX FM PST HELP

Formula

This element is used by the deduction HELP to calculate the HELP tax on back payments.

TAX FM PST SFSS

Formula

This element is used by the deduction SFSS to calculate the SFSS tax on back payments.

TAX FM PST FRGN

Formula

This element stores tax on retro from the current year in the element TAX VR FRGN DELTA, which in turn is accumulated as FRGN DELTA_FYTDA (This works in a similar manner as the MARGINAL TAX’s post process formula TAX FM PST MRG TAX).

TAX FM PST FRGN also calls TAX FM BACK PAY by feeding RETRO FR CY (retro from the current fiscal year) and RETRO FR PY (retro from prior fiscal years and within 12 months from the payment date) as inputs and resolves tax into PG TX FRGINC element.

TAX DT CURR -12MT

Date

This element retrieves the current period payment date from the system element CURR PRD PYMT DT and subtracts one year from it to determine the date that is exactly 12 months prior to it.

Note: The date 12 months before the payment date is critical to the tax process because the calculation method varies depending on whether salary or wages accrued more than or less than 12 months prior to the payment date.

TAX DR PERIOD RTO

Duration

TAX DR PERIOD RTO returns the difference between the retro start date or date that payments began accruing in the past (contained in the variable TAX VR RTO STRT DT) and the tax year begin date (contained in the date element TAX DT TAXYR BGN). The difference between these dates is equivalent to the duration that payments accrued over the previous year. This duration is expressed in days and is used by the formula TAX FM PERIOD WK (see below).

Note: The value of the element TAX VR RTO STRT DT is set by the formula TAX FM RTO STRT DT to ensure that back payments and wages are divided by the correct number of pay periods in step 2 of the calculations described above.

TAX BR PRD FACTOR

Bracket

This bracket returns the period factors that enable the formula TAX FM PERIOD WK (see below) to convert the number of days returned by the duration element TAX DR PERIOD RTO to a specific number of weeks, biweekly periods, months, or other durations depending on the normal pay period length. The search key in the bracket is the system element PRD FREQ NAME (period frequency name), and the specific frequencies for which the bracket returns period factors are W (weekly), B (biweekly), F (every four weeks), and M (monthly).

Important! You may need to define pay period factors in addition to those delivered by PeopleSoft. To do this, enter the number of weeks in the pay period for each pay period frequency you add to the bracket. For example, for a pay period frequency of every three weeks, the period factor would be 3, since there are three weeks in the period.

Note: Define pay period frequencies using the Frequency Table component in PeopleSoft Human Resources (FREQUENCY_TBL).

TAX FM PERIOD WK

Formula

This formula divides the duration in days returned by the element TAX DR PERIOD RTO by seven to arrive at a duration in weeks. Global Payroll for Australia later converts this weekly duration to the correct number of months, biweekly periods, or four-weekly periods (depending on the applicable pay period length) using the conversion factor supplied by the bracket TAX BR PRD FACTOR (see above).

TAX FM RTO STRT DT

Formula

This formula sets the value of the variable TAX VR RTO STRT DT used by the duration element TAX DR PERIOD RTO (see above). If the date the payments begin accruing is greater than 12 months prior to the payment date, this formula sets the value of TAX VR RTO STRT DT (retro start date) equal to the date returned by the element TAX DT CURR -12MT (the date that is exactly 12 months before the payment date). This is to ensure that the back payments are divided by the standard number of pay periods in a year (according to step 2 under Tax Calculations When Salary or Wages Accrued More Than 12 Months Before the Payment Date). And if the date payments begin accruing is less than or equal to 12 months prior to the payment date, the formula sets the value of TAX VR RTO STRT DT (retro start date) equal to the effective date of the retro trigger contained in the element TAX VR TRGR EFFDT. This is to ensure that the payments are divided by the number of pay periods to which they apply (as described in step 2 under Tax Calculations When Salary or Wages Accrued Less Than 12 Months Before the Payment Date).