Back Payments -Schedule 5

Schedule 5 – Tax table for back payments, commissions, bonuses and similar payments is used when a back payment of salary or wages is made as a lump sum payment in arrears.

Two possible methods of tax calculation are provided.

Online details of Schedule 5 – Tax table for back payments, commissions, bonuses and similar payments.

The effect of the calculation is to enable tax to be withheld at a rates which approximates the appropriate amount of tax which would apply on an annual tax return basis.

A qualifying “back payment” is a payment (or part of one) which was meant to have been made in a previous period.

It may include:

  • lump sum payments in arrears
  • commissions
  • a bonus or similar payment (not being a normal current-year bonus, see examples below)

and may also be

  • taxable compensation or sickness or accident payments for an incapacity for work
  • Austudy or ABSTUDY
  • assessable Social Security or Veterans’ Entitlements or similar

Examples of Eligible Payments in Arrears

Generally, the eligible back payments are in the nature of “catch-up” payments.

Examples drawn from Schedule 5 include:

  • wages which were underpaid in a past period due to having overlooked an award allowance
  • a bonus paid later than it should have
  • leave loading – if it is made as a lump sum and not on a pro rata basis as leave is taken  
  • a once-only compensation payment for a changed work location
  • a sign-on bonus for entering a workplace agreement
  • potentially any lump sum allowance.

What Does Schedule 5 do?

Using Schedule 5 provides formulae (Method A or B) for a step-by-step calculation sequence to effectively calculate the tax rate at an average which reflects the recipient’s earnings in the relevant time periods.

It is important that the calculation schedule is not mis-applied, because an incorrect calculation could result in the employee being under-taxed, and then the possibility of an unexpected tax bill arising when the tax return is lodged.

Usual rules around the provision of a TFN and employee tax declaration apply – in default of which withholding is required at the maximum rate of 47% for residents, or 45% for non residents.

Tax Return – Lump Sum Payment In Arrears Tax Offset

When the day of reckoning arrives and a tax return is being prepared, it is the Delayed Income Tax Offset which offsets the tax on lump sum payments for tax assessment purposes.

The offset applies to “eligible income” as defined in Section 159ZR ITAA 1936.

The offset is calculated by determining the effect of the lump sum on average tax rates over the tax years in which the lump sum was earned and when it was paid. How this works in detail is explained here: Delayed Income Tax Offset

Further information

Schedule 5 – Tax table for back payments, commissions, bonuses and similar payments – ATO

This page was last modified on 2021-06-03