Garden Leave Pay: Is It a Deductible Business Expense in Australia?

Garden leave — paying an employee their full salary while requiring them to stay away from the workplace through their notice period — is treated by the ATO the same way as ordinary wages. It is fully deductible against your assessable income under section 8-1 of the Income Tax Assessment Act 1997, as a normal cost of carrying on a business.

The same is true for Super Guarantee, PAYG withholding, and payroll tax — they all apply to garden leave payments at the same rates as the employee's ordinary wage. There is no separate tax category for garden leave; the ATO treats it as wages.

The exceptions where it gets murky: payments dressed up as garden leave to disguise a settlement (treated as ETPs), restraint-of-trade payments lumped into the same agreement (potentially capital, not deductible), and FBT on continued benefits like a company car or phone during the leave period.

Authoritative sources: ATO — Wages and salaries deductions, ATO — Employment termination payments.

During a notice period, the employment relationship is still on foot. The employer is paying wages; the employee is bound to remain available, not to compete, and to maintain confidentiality. The fact that no work is being performed during garden leave doesn't change the legal characterisation of the payment — it's still salary under a contract of employment.

The ATO's general deduction provision (section 8-1 ITAA 1997) allows a deduction for a loss or outgoing incurred in producing assessable income or in carrying on a business. Wages are the textbook example. There is no special rule that excludes wages paid during garden leave.

What this means in practice for a typical case:

• Income tax deduction: Yes — full deduction in the income year the payment is made.
• Super Guarantee: Yes — applies at 12% (2025-26) on ordinary time earnings, which includes garden leave salary. The exception is the Maximum Super Contribution Base ($65,070/quarter for 2025-26).
• PAYG withholding: Yes — at the standard schedule based on the employee's TFN declaration.
• Payroll tax: Yes — wages paid during garden leave count toward your state payroll tax threshold.
• Workers compensation premium: Yes — most state schemes count garden leave wages toward your declared remuneration.
• Annual leave accrual: Yes — leave continues to accrue during garden leave because the employment is on foot.

Confusion arises when a garden leave arrangement is bundled with a separation deed or a "go away" payment. The labels matter less than the substance:

• True garden leave — the employee remains employed, on payroll, accruing leave, contracted not to commence other work. The notice period is being served. Treated as wages, fully deductible.
• Pay-in-lieu of notice (PILON) — employment ends immediately, the employer pays out the notice period as a lump sum. This is an Employment Termination Payment (ETP). Tax treatment: deductible to the employer but the employee is taxed at concessional ETP rates up to the cap. Super doesn't apply.
• Settlement payment dressed as garden leave — common in executive separations. If the substance is "we want you gone, here's money to leave", the ATO will look through the label. Risk: the deduction may be challenged if it's not genuinely wages-for-services.

The structural test the ATO applies: was the employment relationship still on foot during the period the payment covers? If yes, wages. If no, ETP. If the contract says "garden leave" but the employee is allowed to commence other employment from the start of the leave period, the ATO is likely to treat it as PILON in substance.

Practical implication for an employer: if you're going to use garden leave properly, the contract or termination letter should specify that the employee remains on payroll, must remain available to the employer, must not commence alternative employment, and must continue to comply with confidentiality and non-disparagement obligations. That documentation supports the deduction characterisation.

Some senior executive arrangements include a separate payment in consideration for an extended post-employment restraint (e.g. a 12-month non-compete). The deductibility of that payment is different.

If the payment is for a one-off, enduring restraint that protects the goodwill of the business, the ATO and courts have historically treated it as capital in nature — not deductible under section 8-1, though it may form part of the cost base of the business goodwill.

If the payment is structured as part of ordinary garden leave wages — i.e. you're paying full salary for 6 months and one of the contract clauses is a non-compete during that period — the payment is wages and deductible. The non-compete is a condition of the wage payment, not a separate consideration.

For larger separations, get specific tax advice on how the restraint payment is structured. The wording of the deed determines treatment.

If you continue providing benefits to the employee during garden leave — company car, phone, laptop, healthcare, parking — those benefits remain subject to FBT for the period of garden leave the same way they were during active employment.

You can't strip the FBT problem just by sending the person home. The benefit is still being provided in respect of employment.

The practical move most employers make: terminate the perks at the start of garden leave (return car, cancel phone, terminate parking pass). The employee's wage continues; the FBT-attracting benefits stop. This requires the contract to allow it, so check the employment agreement before assuming.

Sarah, executive on a 6-month notice period, $250,000 base salary:

• Garden leave wages over 6 months: $125,000.
• Super Guarantee 12%: $15,000 (capped at the MSCB; $65,070 × 4 quarters = $260,280, so the cap binds at $250k+ but Sarah's portion in the half-year sits below one half of the annual cap, meaning full SG applies).
• PAYG withheld: ~$36,000 (at top marginal rate plus Medicare).
• Payroll tax (NSW @ 5.45%): $6,813.
• Annual leave accrued during garden leave: 5/52 × full year (around 1.92 weeks at her pay rate).

Tax treatment for the employer:

• $125,000 wages — fully deductible.
• $15,000 SG — fully deductible.
• $6,813 payroll tax — fully deductible.
• Total deduction: ~$146,800.

If structured as PILON instead (employment ended, ETP paid for the same notional 6 months): the $125,000 lump sum is an ETP, deductible to the employer but the SG ($15,000) doesn't apply, payroll tax treatment varies by state (NSW: PILON is taxable, ACT: also taxable, Victoria: not taxable for payroll tax). The employee receives a smaller after-tax amount due to ETP cap interactions.

Garden leave is generally more expensive than PILON for the employer (because of SG and continued payroll tax) but cleaner for restraint enforcement and easier to justify as deductible wages in an audit.

Can I deduct garden leave for a sole trader who has no other employees?
Yes — if you're a sole trader and you employ someone, the wages you pay them (including during garden leave) are deductible against your business income.

What if the employee starts a competing job during garden leave?
You may have grounds to terminate the garden leave arrangement and stop paying. Your deduction for the period before they breached is unaffected. Recovering payments already made is harder — it's a contract dispute, and you'd need to show the breach justified termination of the payment obligation.

Is garden leave the same as suspension on full pay?
Functionally similar but legally distinct. Suspension is typically used in disciplinary contexts pending investigation. Garden leave is contractual, used in resignation/termination scenarios. Tax treatment of both is the same — wages, deductible.

Does garden leave affect long service leave entitlements?
Generally yes — service continues during garden leave because the employment is on foot. Long service leave continues to accrue.

Can I require the employee to take their accrued annual leave during garden leave?
You can request it. Whether you can require it depends on the employment contract and the relevant award or enterprise agreement. The Fair Work Act allows employers to direct employees to take leave when reasonable; what's reasonable in a garden leave context is fact-specific.