RMIT Classification: Trusted

Chapter 2

Set up and manage payroll systems

FNSTPB402 Establish and maintain

payroll systems

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What have learnt so far?

1.1 Introduction to Payroll
1.2 Legislation & Regulatory Bodies
1.3 Collecting data

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Learning Objective
2.1 Gross Pay 2.10 PAYG Withholding
2.2 Net Pay
2.3 Ordinary Pay
2.4 Overtime
2.5 Piece Rates
2.6 Commission
2.7 Annual Salary
2.8 Allowances
2.9 Annual Leave Pay and Personal
Leave Pay

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Learning Objective
2.10 PAYG Withholding
2.11 PAYG Withholding and HELP Repayments
2.12 Leave Paid in Advance
2.13 Holiday Leave Loading and PAYG Withheld
2.14 Bonuses
2.15 Salary Sacrifice
2.16 Deductions
2.17 Tax Calculator

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Objective
Upon completion of this topic you should be
capable of:
• establishing a manual payroll system
• manually processing employees’ weekly pays
• preparing payroll reports
• ensuring compliance with payroll legislation
• maintaining a manual payroll system
• managing payroll inquiries

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2.1 Gross Pay Calculations

Gross Pay is the total amount to which the employee is
entitled. Determining gross pay:

• Award or employment agreement conditions for minimum /

maximum hours, ordinary and overtime rates and leave
entitlements;
• Rate per hour for part-time, casual or irregular employment;
• Rate per unit produced; or piece work method;
• Commission earned; where a percentage of sales achieved
is paid to an employee;
• Annual salary without any entitlement to overtime.

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2.2 Net Pay

• Net pay is the Gross Pay less PAYG

Withholding Tax and less any other
deductions.
• It is the amount actually paid to the
employee on pay day.

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Example: Net Pay

Donna is paid $500 gross wages for the week.

PAYG Withheld is $38 and weekly deductions are
$40 for medical insurance and $120 home loan
repayment.

Net Pay = Gross Pay – PAYG Withheld – other

deductions
= $500 – 33 – 40 – 120
= $307.00

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2.3 Ordinary Pay

Ordinary time is the normal hours worked each week - normally 38 hour week.

Ordinary Pay = Ordinary Hours Worked x Rate per

Hour

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Example: Ordinary Pay

John’s award provides a 38-hour week. His hourly

rate is $20. This week John worked the regular 35
hours. How much is his gross pay?

Solution:
John’s Gross Pay = 38 hours x $20/hr
= $760.00

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2.4 Overtime
• Overtime is paid for hours worked in excess of
normal hours.
• Overtime is paid at one and a half times the
normal rate for the first 3 hours per week and
thereafter at double the normal rate.

Overtime pay = Overtime hours worked x

Overtime rate per hour

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Example: Overtime Pay

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2.5 Piece Rates

Employees under piece rate arrangements are paid per
unit of output.

EXAMPLE
Eric works in a clothing factory and is paid $4 for each
shirt stitched.

This week Eric stitched 100 shirts. How much is his gross
pay?

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2.6 Commission

Commission is commonly paid to salespeople to

motivate employees to make sales.

Gross pay of salespeople usually consists of a

retainer (a base pay) plus commission.

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Example: Commission

Norman’s employment agreement provides a

retainer of $500 per week plus 2% commission on
sales he made during the week. This week, Norman
made sales of $1,000. How much is his gross pay?

Solution:
Norman’s gross pay = $500 + (0.02 x 1,000)
= $520.00

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2.7 Annual Salary

• A salary is remuneration usually quoted as a

yearly figure, but paid weekly, monthly or
fortnightly.
• There is usually no payment of overtime.

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2.8 Allowances
Allowances fall into two broad categories:

1 - By way of a reimbursement or
compensation. Eg Car , Meal Allowances.

2 – By way of Unconditional extra payment.

E.g. Shift, First aid, Travel Allowances.

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Exercise Self Test 1, page 79

Calculate the Gross Wages for the following workers that are full-time
employee whose normal hours are 38 hours per week. They are
entitled to overtime at the rate of time and a half for the first 3 hours
overtime per week, and thereafter at double time.

Jack worked 38 hours plus 2 hours overtime. Hourly rate $30. Meal
allowance $20 per meal x 1 meal.

William was sick one day but worked normal hours for the remainder of
the week, with 3 hours overtime, Hourly rate $34. Meal Allowance $20
per meal x 1 meal.
Emily is paid 75c per box of liquorice packed. This week she packed 200
boxes.
Isabella is paid a retainer of $450 per week plus 2% commission of all
sales for the month. Her sales for the week are $56,000.

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Solution
Jack 38 hours x $30 $1,140
2 hours OT x ($30 x 1.5) = 2 x $45 $90
Total Gross Pay $1230

William 7.6 hours sick @ $34 182.4

30.4 hours x $34 729.6
3 hours OT x ($34 x1.5) = 3 x51) 153
Total Gross Pay $1,020

Emily 50c x 200 = $100 $100

Isabella
450+ 0.02 x 56000 1,570
Total Gross Pay $1,570
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2.9 Annual Leave Pay and

Personal Leave Pay

• Modern Awards and employment agreements

are required to provide a minimum entitlement
of 4 weeks (20 days) annual leave per year
and 2 weeks (10 days) personal leave p.a. for
full-time employees.
• Some employees are also entitled to a leave
loading of 17.5% (on their annual leave
payment)

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2.9 Annual Leave Pay and

Personal Leave Pay

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2.10 PAYG Withholding

PAYG Withholding (personal income tax) is deducted from

an employee’s pay and remitted by the employer to the
ATO
Factors affecting the amount withheld:
 Gross Pay
 Resident of Australia
 Tax–Free threshold ($18,200)
 TFN Notification
 HELP debt
 Tax offsets

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PAYG Withholding

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Tax Offsets

• Tax offsets directly reduce the amount of tax

that has to be paid.
• An offset may be granted because:
o a taxpayer on a given level of income is
supporting a family (Family tax benefit)
o or to those working in isolated areas or
o serving overseas.

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Tax Offset Table

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Tax Offsets - Example

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Tax Offsets - Example

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Payment to Contractors
• Payments made to contractors generally do not
have PAYG amounts withheld.
• The payment made to this party can be withheld
only when there is a ‘Voluntary withholding
Agreement’ in place with the business, or they
are not quoting a valid ABN.

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Exercise – Self Test Ex 2, page 87

TFN Gross Tax-Free Tax offsets

Provided Weekly pay Threshold per year PAYG Withheld

(a) Yes $800 Yes Nil

(b) Yes $550 Yes $839

(c) Yes $746 No Nil

(d) No $1,096 No Nil

(e) Yes $380 Yes $660

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Solution
TFN Gross Tax-Free Tax offsets
Provided Weekly pay Threshold per year PAYG Withheld

(a) Yes $800 Yes Nil $101

$47 - ($15+$1) =
(b) Yes $550 Yes $839 $31

(c) Yes $746 No Nil $195

$1,096 X .47 =
(d) No $1,096 No Nil $515

(e) Yes $380 Yes $660 $4 - (11+1) = Nil

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Taxable Allowances
If an employee is paid a taxable allowance, add the allowance to the gross wages to
find the PAYG Withholding

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Taxable Allowances
If an employee is paid a taxable allowance, add the allowance to the gross wages to
find the PAYG Withholding

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What did we cover in class today?

2.1 Gross Pay
2.2 Net Pay
2.3 Ordinary Pay
2.4 Overtime
2.5 Piece Rates
2.6 Commission
2.7 Annual Salary
2.8 Allowances
2.9 Annual Leave Pay and Personal
Leave Pay
2.10 PAYG Withholding

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2.11 PAYG Withholding and HELP

Repayments

The HELP Tax Table (see Appendix) is used to

calculate the additional amount of tax that must
be withheld when the employee has a HELP
debt.

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2.12 Leave Paid in Advance

When an employee is paid annual leave in

advance this is generally processed with their
normal pay run prior to taking the leave to avoid
any incorrect deductions of PAYG.

Paid annual leave in advance =

Weekly PAYG Withholdings x the number of
weeks leave being taken

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Example: Leave Paid in Advance

Doug is paid $1,420 gross pay per week (PAYG Withheld
$307). This week Doug goes on leave and is to be paid 4
weeks leave in advance. How much is Doug’s net annual
leave payment received?

Solution:
Doug’s gross annual leave pay is $1,420 x 4 = $5,680
and tax is $307 x 4 = $1,228.
Net pay = $5,680 – $1,228 = $4,452

Self-Test Ex5, page 91

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2.13 Holiday Leave Loading and PAYG

Withheld

• Some employees are entitled to annual leave

loading (Holiday Leave Loading or HLL), which
is normally 17.5% of the gross Holiday Pay

• If using weekly tax tables, calculate the weekly

wages plus weekly leave loading, then use
this amount to determine the ‘NEW’ weekly
PAYG Withheld. Multiply this by the number of
weeks leave taken

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Example: Holiday Leave Loading

Self-Test Ex.6, page 92

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2.14 Bonuses
PAYG Withheld on bonuses is calculated on a
periodic (weekly, fortnightly) basis as if an
additional amount to normal weekly pay.

Self-Test Ex7, page 93

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2.15 Salary Sacrifice

Salary sacrifice is an arrangement where an
employee agrees to forego part of his/her future
salary or wages in return for the employer providing
benefits of a similar value
Common Examples of Salary Sacrificed benefits:
• Superannuation
• Car Fringe Benefits
• Expense payment fringe benefit such as
school/child care fees and loan repayments

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Example: Salary Sacrifice

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Example: Salary Sacrifice

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Example: Salary Sacrifice

Self-Test Ex 8, page 95

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2.16 Deductions
Employers and employees may agree that other
amounts be deducted from the employee’s pay.
These are personal expenses of the employee
Examples include :
• Personal Superannuation contributions.
• Private health insurance.
• Union Fees.

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Example: Deductions

Gavin’s gross weekly wage is $966. PAYG

Withholding is $150 and weekly deductions are $45
for health insurance and $12 for union fees. What is
Gavin’s net weekly pay?

Solution:
Net pay = Gross pay – PAYG – Other Deductions
= $966 – 150 – 45 – 12
= $759.00

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2.17 Tax Calculator

As an alternative to using the tax tables the ATO provides an electronic tax
calculator that can be used to determine withholding amounts.

Self-Test Exercise 9, page 99

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What did we cover in Chapter 2?

2.1 Gross Pay
2.2 Net Pay
2.3 Ordinary Pay
2.4 Overtime
2.5 Piece Rates
2.6 Commission
2.7 Annual Salary
2.8 Allowances
2.9 Annual Leave Pay and Personal
Leave Pay
2.10 PAYG Withholding

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2.10 PAYG Withholding

2.11 PAYG Withholding and HELP Repayments
2.12 Leave Paid in Advance
2.13 Holiday Leave Loading and PAYG Withheld
2.14 Bonuses
2.15 Salary Sacrifice
2.16 Deductions
2.17 Tax Calculator

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Activity – Chapter 2 quiz

Refer Quiz in Canvas

✍️Chapter 2 Quiz – Payroll Calculations

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Any
questions?

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