Understanding Leave Loading
Many companies pay employees LL payments in addition to the leave time that the employees are paid when they take leave. The intention of LL payments is to make up for the amount of earnings that the employee potentially could have earned in overtime or bonuses if the leave had not been taken.
Typically, LL payments are paid at 17.5 percent of the amount of leave pay that an employee receives. For example, if an employee receives 1000 AUD in leave pay, an LL payment of 175 AUD would be added to the employee's earnings during the period in which the leave is paid.
Throughout the tax year, employees who are eligible to receive LL payments pay an additional amount of tax. Therefore, a portion of the LL earnings that an employee receives is not taxed at the time it is received. The current tax-free threshold for LL payments is 320 AUD. After an employee receives 320 AUD in LL payments, all additional LL payments are taxed according to current tax regulations.
For example, if the first vacation that an employee takes during the tax year results in a LL payment of 200 AUD, the entire payment is tax-free. If the employee takes another vacation, which also results in a LL payment of 200 AUD, only 120 AUD of that payment is tax-free. The remaining 80 AUD is considered taxable earnings.
To correctly calculate LL payments, you must create a Leave Loading benefit, which is based on the pay types that the organization uses for annual leave. In addition, you must set up the LL tax rule for each tax scale that the organization uses. Each of the tax rules must include the tax-free threshold, which is currently 320 AUD. Finally, you must enter the leave loading percentage (typically 17.5 percent) in the processing options for the Australian Employee Termination Entry program (P75A0008).