Auto system tax calculations

Explanation of system tax calculations.

When calculating tax on wages dividends

ARITA has negotiated special rates of PAYG tax deductions for insolvency practitioners to calculate tax.

There is also an ATO tax ruling that supports the use of these rates for insolvency practitioners. We assume this is intended to make it easier for insolvency practitioners to calculate tax. 

The rate used is equivalent to the mid-rate of the marginal tax scales for PAYG deductions. The mid-rate is currently 32% plus Medicare 2.5%. This rate changes, so rather than refer to this rate as a percentage, we will refer to this as the mid-rate.

Calculating tax on wages at the mid-rate

As the mid-rate has been adopted by most of the industry the software auto system calculations now use the mid-rate to calculate tax for all dividend payments.

There are exceptions when calculating tax free-components.

Calculating tax on dividends (wages) at normal marginal rates

Using the software, it is not any more difficult to calculate tax at marginal tax rates, since the system calculates the tax for you. This feature for dividend payments will be deprecated from version 5.2.

Prior to version 5.2, the software calculated tax at prevailing marginal rates based on tax scales.

Pay Wages

Tax calculations within the Pay Wages facility use ATO tax tables listed here. This is approximately based on the marginal rates with rounding and different tax scale periods accounting for slight differences in a straight translation of the marginal tax rates.

To calculate tax based on the tax scales (marginal rates), you need to know:

• the date of the payment
  
  This determines the tax scale that applies and is the date of the dividend or payment.
  
  
• the length of time attributable to the payment
  
  This length of time is the To and From dates in the pay wages payroll period.
  
  Note for a dividend:
  
  The length of time attributed to a wages claim is calculated by the total wages claim divided the weekly wages. For example, if the wages claim is $1000 and the weekly wage is $500, then the claim represents two weeks.
  
  The employee needs a weekly wage rate entered to be able to calculate marginal rates.
  
  
  If the weekly wage is not entered then the system will fall-back to the mid-rate for calculating claims.

Other tax options

There are also other options for treating tax depending upon whether the Medicare allowances should be considered or specific loading options, as follows:

In most circumstances, the tax calculation is pre-calculated before the dividend is paid.

Preservation age

When an employee has reached their preservation age as outline in this ATO article, the tax will be calculated at a reduced rate of 17%