2022.05 Employee tax treatment codes

Each employee has a tax treatment code that is submitted to STP.  This article explains the information submitted by the employee, the way it is entered into the system and how the tax treatment code is generated from that information.

Example of a tax treatment codes are:

RTXXXX - Regular employee claiming tax free threshold

RDXXXX - Regular daily casual

Further details of each character element in the code are detailed below.

Collecting and entering the information

When a employee starts, or their personal tax circumstances change, they should provide the appointee with one or more of the following forms:

NAT 3092 Tax file number declaration – provide TFN, identity, employment basis, tax
residency status, tax-free threshold, study and training support loans.

NAT 3093 Withholding declaration – reference TFN, identity, provide tax residency status,
tax-free threshold, study and training support loans, claim tax offsets and amount or living
arrangements.

NAT 0929 Medicare levy variation declaration – reference TFN, identity, provide surcharge
rate, exemption status, claim a reduction for the number of dependants or from repayment
of study and training support loans.
NAT 2772 Voluntary agreement for PAYG withholding – reference ABN, identity, GST
status, Commissioner’s instalment rate

The appointee must have additional data about the worker to ascertain which tax treatments to
establish for the payee, such as:

Right to Work – an employer obligation to establish proof that the payee has a right to
work in Australia, supported by legal documents that may also constrain aspects of
employment. 

Registration Status – the registration status of the payer to engage a specific class of
worker may dictate the tax rate.

Profession – specific job or basis for which the worker has been engaged that may dictate
a specific Tax Treatment. 

Work Pattern – if the work pattern is irregular and therefore the payments will not be
regular, a specific Tax Treatment may apply.

Age/Income Support – proof of date of birth and/or pension that may dictate a specific
Tax Treatment or approved TFN exemption status.

Some data, if not provided, will dictate the tax arrangements for PAYGW, such as not
providing the TFN Declaration and quoting either a valid TFN or claiming an exemption from quoting a valid TFN, that requires the payer to withhold the top rate of tax on all payments to the payee.

The information supplied by the employee is entered into the tax tab on the employee form.  The fields highlighted below determine the employee's tax treatments and the applicable tax scales to be used in calculating their PAYG liability:

Note: All values in the employee tax tab can be exported and imported into the system.  Please see the import template attached to this article for an example.

Tax treatment category

The following categories of tax scales apply to the employee:

A (Actors) – Australian residents for tax purposes who have provided a valid TFN or TFN
exemption reason and are actors, variety artists and other entertainers who receive
payments for their performances. It includes employees performing promotional activities.

C (Horticulturists and Shearers) – all employees working for a continuous period not
exceeding six months in any horticultural process associated with the production,
cultivation or harvest of a horticultural crop or in the shearing industry such as shearers,
crutchers, wool classers, cooks, shed hands and pressers that have provided a valid TFN
or TFN exemption reason. It excludes workers covered by another tax table, such as for
WHM and SWP, but includes foreign residents.

D (ATO-Defined) – when the ATO issues a written notice to the payer to vary the PAYGW
downwards (for gross income or specific payments only) for the payee; the payee is a
death beneficiary (who is not also an employee) or the payee is not covered by any other
tax table, such as for a non-employee for superannuation guarantee purposes only.

F (Foreign Resident) – employees who answered “no” to the question “Are you an
Australian resident for tax purposes?” on their TFND or WD. It excludes workers who are
covered by specific tax tables such as for Horticulturists and Shearers (different rate for
foreign residents from this common rate), WHM or SWP. 

H (Working Holiday Makers) – foreign residents for tax purposes who are working in
Australia under a Working holiday makers visa (subclass 417) or Work and holiday makers
visa (subclass 462) or other bridging visa arrangement.

N (No TFN) – employees who have not provided a TFND, provided a TFND but have not
supplied a TFN and also not claimed an exemption from having to provide a TFN, except
for SWP workers.

R (Regular) – all employees not otherwise covered by another tax table, including
directors, office holders, religious practitioners, labour-hire workers and Pacific Labour
Scheme workers.

S (Seniors and Pensioners) – workers who are 66 years of age or older; or veterans
receiving a service pension and/or war widows/widowers receiving an income support
supplement from the Department of Veterans’ Affairs who are at least 60 years of age.

V (Voluntary Agreement) – a contractor under a voluntary agreement to withhold under
section 12-55 of Schedule 1, Part 2-5 of the TAA 1953, including those who have informed
the payer of their CIR, that they don’t have a CIR and if the payment includes an amount
for GST.

Tax treatment options

Within each of these categories of tax scales are options that vary the rate of withholding.
These options are specific to each category.

B, V or Z (ATO-Defined Circumstances) – unlike the other options that further define the
PAYGW options available in the tax table, the ATO-Defined category contains specific
variation reasons, such as the downwards variation of PAYGW (V), the default value to be
used for a death beneficiary that is not an existing employee (B) or for a non-employee (Z)
when their Super Entitlement Type-L (Liability) YTD amount is
advised via the STP pay event.

C or O (Commissioner’s Instalment Rate) – individual contractors with an ABN may
provide their payer with a voluntary agreement quoting the (PAYG) instalment rate issued
by the Commissioner of Taxation (C) or state that they do not have one (O – Other rate).

F (Specific Foreign Residency) – other than for the category for Foreign Residents for
tax purposes, a specific option may exist to vary the withholding for specific classes of
workers. The variation may use a different flat rate of withholding (such as for
Horticulturists & Shearers) than the general foreign resident tax rate, or may be used to
discretely identify the income type for those foreign residents who do not provide a TFN
(such as for WHM). No further supplemental variations to PAYGW may be applied.

I, M or S (Living Arrangement) – seniors and pensioners may have concessional
withholding rates applied for their personal circumstances and living expenses, based
upon their spousal living arrangements: single, married or married but living apart due to
illness. Further supplemental variations to PAYGW for the payee may apply.

N or T Tax-Free Threshold – this is a common option across some tax categories that may provide the payee with a choice to claim the tax-free threshold (T) that permits no withholding on payments up to the limit of the next threshold (range of taxable income), where payments are then subject to withholding. Some tax categories only apply to payees who have claimed the tax-free threshold. A payee may choose not to claim the tax-free threshold (N) if they have income from more than one payer. This choice may limit permissibility of other supplemental variations to PAYGW for the payee.

P Promotional/Programme – specific workers have a flat rate of tax applied to all
payments, such as for performing artists contracted to perform promotional activity or for
SWP workers. No further supplemental variations to PAYGW may be applied.

Medicare levy surcharge

This is additional rates of Medicare Levy imposed on those who do not have an appropriate level of private patient hospital cover and earn above a certain income. The rates are dependent upon domestic circumstances (single/family) and combined family income thresholds.

Medicare levy exemption

This is a full or half exemption from Medicare Levy for those who meet certain medical requirements; are a foreign resident; or are not entitled to Medicare benefits.

Medicare levy reduction

This is a reduction in the rate of Medicare Levy based on family taxable income below a certain threshold and consideration of the number of dependants, if any. Claiming this variation may also absolve the payee from repayment of Study and Training Support Loans that would otherwise be payable, for the period of reduction.

Tax treatment code structure

The following graphic details the structure of the employee tax treatment code.  Note that users do not need to enter the tax treatment code, it is constructed by the system and submitted to STP based on the options entered into the STP 2 tax tab.

Character 1 - Tax treatment categories of tax scale that is a mandatory value and represents an abbreviation of the common reference to the type of payee or regulator. Each category has a unique alpha-value within this character set and the categories are stable but may be removed or supplemented upon government tax policy change. 

Character 2 – Tax treatment options within each Category that represent the variations to the core rate of withholding and is a mandatory value. The values are unique within each category but may be duplicated within this character set (across categories). The options are stable but may be changed upon government tax policy change. 

Character 3 – Study and Training Support Loans (STSL) is an alpha field that represents a positive value if the payee has identified the existence of their government-provided loan. This is a single value to represent the response to the polar question of STSL. This value, if positive, will not be impacted by any other variations the payee may claim, such as for a Medicare Levy Reduction based on family income that would exempt the payee from compulsory STSL repayments. This optional variation is not applicable to all categories of tax scales.  This information is entered via the More --> Study and training option on the employee tax tab.

Character 4 - Medicare Levy Surcharge (MLS) is an alpha-numeric field that represents the Tier level of any additional Medicare Levy percentage rate nominated by a payee who does not have an appropriate level of private patient hospital cover and earns above a certain income. As the Tier percentage rates are stable, but may be varied by government tax policy changes, only the Tier level is reported, not the actual rate, thus accommodating any future rate change. In this way, although the rates may change, the Tier levels will remain stable. They may only vary if Tier levels are added or removed. This optional variation is not applicable to all categories of tax scales. If the payee meets the conditions to apply the MLS, they cannot meet the criteria for exemption/reduction. These are mutually exclusive. That is, if surcharge, no exemption or reduction can apply.

Character 5 – Medicare Levy Exemption is an alpha field that represents the level of exemption from paying the Medicare Levy claimed by a payee. If an exemption is claimed by the payee, this will reduce the rate of the Medicare Levy component of PAYGW. 

Character 6 – Medicare Levy Reduction is an alpha-numeric field that represents the number of dependants for low-income earners to reduce the rate of the Medicare Levy component of PAYGW if claimed by a payee. This single field accommodates both the spouse and number of dependent children. This optional variation is not applicable to all categories/options.

Note:  Only characters 1 (Category) and 2 (Options) are compulsory.  If this information is not entered into the system, default values of Category = R (Regular) and Options = T (Tax free threshold) will be submitted to STP.   The ATO will take this to mean that the employee is a regular employee claiming the tax free threshold.  If the employee is not of this type, then the correct information must be entered into the system.

Characters 3 to 6 (Study and Medicare levy variations) are optional and the value X will be submitted to STP if these values are not entered into the system.

Note: All values in the employee tax tab can be exported and imported into the system.  Please see the import template attached to this article for an example.

Valid category and options combinations

Each category allows certain valid options.  A document detailing the valid combinations in a matrix format is attached to this article as ATO STP Phase 2 Tax Treatment Position Paper (Validation Extract).pdf.

Please refer to this document for valid combinations, noting that invalid combinations will not be accepted by STP.