Published: August 2025
Calculating final pay for employees leaving your business is a critical task for Australian employers to ensure compliance with the Fair Work Act 2009 and Australian Taxation Office (ATO) requirements. Final pay includes outstanding wages, accrued leave entitlements, and other payments, minus appropriate taxes.
This guide outlines the steps to accurately calculate final pay in Australia, with examples and compliance tips to help businesses meet legal obligations and support departing employees.
What is Final Pay in Australia?
Final pay refers to the total amount an employee receives when their employment ends, whether due to resignation, termination, or redundancy. It typically includes:
- Outstanding wages or salary for hours worked.
- Accrued but unused annual leave.
- Long service leave (if applicable).
- Redundancy payments (if eligible).
- Other entitlements, such as notice periods or bonuses, as per awards or contracts.
Employers must comply with the Fair Work Act and ATO regulations, ensuring accurate calculations and timely payments. Incorrect final pay can lead to penalties or disputes, with Fair Work recovering $500 million in underpayments annually.
Why Calculating Final Pay Correctly Matters
- Legal Compliance: Meets Fair Work and ATO requirements, avoiding penalties.
- Employee Fairness: Ensures departing employees receive their full entitlements.
- Business Reputation: Demonstrates professionalism and compliance.
- Audit Protection: Accurate records prevent issues during ATO or Fair Work audits.
Steps to Calculate Final Pay in Australia
Follow these steps to calculate an employee’s final pay accurately.
Step 1: Confirm Employment Details
Verify the employee’s employment contract, award, or enterprise agreement to determine entitlements.
- How to Do It: Check employment terms, including wage rates, leave accruals, and notice periods, via Fair Work resources at https://www.fairwork.gov.au/employment-conditions.
- Example: A Sydney retail employee on the General Retail Industry Award 2020 earns $30/hour, works 38 hours/week, and has a two-week notice period.
- Tip: Review the relevant award or agreement for specific entitlements.
Step 2: Calculate Outstanding Wages
Determine wages owed for hours worked up to the termination date, including the notice period if worked.
- How to Do It: Multiply hours worked by the hourly rate, including any penalties or loadings.
- Example: The retail employee works 38 hours in their final week and two weeks’ notice (76 hours total) at $30/hour, totaling $3,420 ($30 × 114 hours).
- Tip: Include overtime or penalty rates if applicable, per award conditions.
Step 3: Calculate Accrued Annual Leave
Include payment for unused annual leave, which accrues at 4 weeks per year for full-time employees (or pro-rata for part-time).
- How to Do It: Calculate accrued hours and multiply by the hourly rate, including leave loading (typically 17.5%) if applicable.
- Example: The employee has 80 hours of unused annual leave with 17.5% loading ($35.25/hour), totaling $2,820 ($35.25 × 80).
- Tip: Check awards for leave loading rules at https://www.fairwork.gov.au/leave/annual-leave.
Step 4: Calculate Long Service Leave (If Applicable)
Include long service leave for employees with sufficient service, typically 7-10 years, depending on state laws.
- How to Do It: Check state-specific entitlements (e.g., 8.67 weeks after 10 years in NSW) and calculate at the current rate.
- Example: After 10 years, the employee is entitled to 8.67 weeks (329.46 hours) at $30/hour, totaling $9,883.80.
- Tip: Verify state rules, e.g., https://www.fairwork.gov.au/leave/long-service-leave.
Step 5: Include Redundancy Payments (If Applicable)
Pay redundancy entitlements if the termination qualifies, based on the Fair Work Act or award.
- How to Do It: Calculate based on years of service (e.g., 4 weeks’ pay for 2-3 years for businesses with 15+ employees).
- Example: The employee, with 2 years of service, receives 4 weeks’ pay (152 hours × $30 = $4,560).
- Tip: Check redundancy rules at https://www.fairwork.gov.au/ending-employment/redundancy.
Step 6: Add Other Entitlements
Include any bonuses, commissions, or notice period payments (if not worked).
- How to Do It: Review contracts for additional payments, like performance bonuses.
- Example: The employee is owed a $1,000 performance bonus per their contract.
- Tip: Ensure contract terms are clear to avoid disputes.
Step 7: Calculate Superannuation
Determine if superannuation applies to final pay components (required for ordinary time earnings, not leave or redundancy).
Step 8: Apply PAYG Withholding
Deduct tax from taxable components (wages, annual leave, bonuses) using ATO tax tables.
- How to Do It: Use the ATO’s tax withheld calculator at https://www.ato.gov.au/Calculators-and-tools/Tax-withheld-calculator/.
- Example: For $7,780 taxable income ($3,420 wages + $2,820 leave + $1,000 bonus), PAYG withholding is approximately $2,000 (based on 2024-25 rates).
- Tip: Check tax rates annually for accuracy.
Step 9: Finalise the Payment
Calculate the net final pay by adding entitlements and subtracting taxes.
- How to Do It: Sum wages, leave, redundancy, and bonuses, then deduct PAYG.
- Example: Total gross pay ($3,420 + $2,820 + $9,883.80 + $4,560 + $1,000 = $21,683.80) minus $2,000 PAYG = $19,683.80 net, plus $393.30 super.
- Tip: Provide a payslip detailing all components.
Step 10: Issue Payment and Report to ATO
Pay the employee by their termination date or within 7 days, and report via Single Touch Payroll (STP).
Common Mistakes to Avoid
- Omitting Entitlements: Missing annual or long service leave leads to underpayment disputes.
- Incorrect Tax Withholding: Misapplying PAYG rates risks penalties up to 75% of underpaid tax.
- Late Payments: Delaying final pay beyond 7 days breaches Fair Work rules.
- Ignoring STP: Failing to report via STP can result in ATO fines.
Tips for Calculating Final Pay
- Use Software: Xero or MYOB automates calculations and STP reporting.
- Engage Professionals: Chartered accountants ensure compliance and accuracy.
- Check Awards: Verify entitlements under relevant awards or agreements.
- Document Everything: Keep detailed records to support ATO or Fair Work audits.
FAQ
What is included in an employee’s final pay in Australia?
Outstanding wages, unused annual leave, long service leave (if eligible), redundancy payments (if applicable), and other contractual entitlements.
Is superannuation paid on final pay?
Super (11.5%) applies to ordinary time earnings like wages, but not leave or redundancy payments.
How is final pay taxed?
Taxable components (wages, leave, bonuses) are subject to PAYG withholding, per ATO tax tables.
When must final pay be made?
Within 7 days of termination or as per award/contract terms, per Fair Work rules.
What happens if I miscalculate final pay?
Underpayments can lead to Fair Work disputes or penalties; overpayments may be non-recoverable.
Scale Suite Services for Payroll and Financial Management
For Australian businesses managing final pay calculations, Scale Suite offers expert financial management services. We ensure accurate final pay calculations, including wages, leave, and superannuation, while meeting ATO and Fair Work compliance.
Our services include payroll processing, STP reporting, and bookkeeping using tools like Xero to streamline processes. Scale Suite delivers tailored solutions to simplify your payroll obligations and support business success.
About Scale Suite
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