Tax on Unused Leave Payout — What You'll Actually Receive
Unused annual leave and long service leave payouts are taxed at different rates depending on how you leave. Learn the tax rates for genuine redundancy, normal termination, and resignation.
Why leave payouts are taxed differently
When your employment ends, your employer must pay out all accrued but untaken annual leave and, in most cases, long service leave. These lump sum leave payments are taxed differently from your regular wages because the ATO applies specific withholding rates depending on the reason for termination and the type of leave being paid out. This can make a significant difference to your take-home amount. The three main scenarios are: genuine redundancy (generally the most favourable tax treatment), normal termination or resignation (taxed differently depending on the type of leave), and retirement due to permanent disability. Understanding these rates is important for financial planning when leaving a job, especially if you have accumulated a large leave balance. Many employees are surprised by the tax taken from their final pay because the withholding rate on leave payouts can be higher than their usual PAYG rate. The good news is that if too much tax is withheld, you will get the excess back when you lodge your tax return — but it can affect your cash flow in the short term.
Annual leave payout tax rates
For annual leave paid out on termination, the tax treatment depends on how your employment ended. If you are made genuinely redundant, the annual leave payout is taxed at a maximum flat rate of 32% (plus Medicare levy). This rate applies regardless of your marginal tax rate — even if you are in a higher bracket, the leave component is capped at 32%. For normal termination (including resignation, end of contract, or dismissal that does not qualify as genuine redundancy), annual leave is taxed at your marginal rate, but the ATO applies a specific withholding method. The payment is split into a 'normal' component and a 'marginal' component to avoid pushing you into a higher tax bracket for that pay period. Leave loading paid on termination is treated separately — the loading component is taxed at a flat rate of 32% regardless of the reason for termination. If you have been on a high income and accumulated significant annual leave, the tax on a lump sum payout at your marginal rate can be substantial — up to 47% (including the 2% Medicare levy) for income above $190,000.
Long service leave payout tax rates
Long service leave has a more complex tax treatment due to historical changes in tax law. For long service leave that accrued after 16 August 1993, the full amount is taxed at your marginal rate (using the same method as annual leave for the applicable termination type). For long service leave that accrued between 16 August 1978 and 15 August 1993, only 5% of the amount is included in your assessable income — effectively taxing it at a very low rate. For long service leave that accrued before 16 August 1978, the entire amount is taxed at a flat rate of 32% (plus Medicare levy). In a genuine redundancy, the tax treatment is generally more favourable. The ATO also applies a tax-free cap for genuine redundancy — a base amount plus an amount per completed year of service, which is indexed annually. For 2024-25, the tax-free limit is $12,524 plus $6,264 per completed year of service. Amounts above this cap are taxed at 32% up to a certain threshold, then at the top marginal rate. These rules make the tax calculation for long service leave payouts quite complex — especially for long-serving employees whose leave spans multiple accrual periods.
Genuine redundancy vs normal termination — tax impact example
The difference between genuine redundancy and normal termination can be thousands of dollars in tax. Consider an employee earning $90,000 per year with 10 years of service who has 8 weeks of accrued annual leave and 6 weeks of long service leave. Their total leave payout is approximately $24,923. Under genuine redundancy: the leave payments attract a maximum withholding rate of 32% (plus Medicare). At 32%, the tax withheld would be approximately $7,975, leaving a net payout of approximately $16,948. Additionally, the redundancy pay itself may be partly or fully tax-free under the genuine redundancy tax-free limit ($12,524 + $6,264 x 10 = $75,164 tax-free). Under normal resignation: the annual leave is taxed at the employee's marginal rate. On a $90,000 income, the marginal rate is 32.5% (plus Medicare) for income between $45,001 and $120,000. The effective withholding on the leave may be higher because the lump sum is added to the final pay period, potentially pushing some income into a higher bracket. The employee may receive several hundred to several thousand dollars less in their final pay compared to a genuine redundancy scenario.
How to calculate your net leave payout
To estimate your net leave payout, follow these steps. First, calculate the gross value of your accrued leave: for annual leave, multiply your weekly pay rate by the number of weeks accrued (check your payslip or HR records for your current balance). For long service leave, calculate based on your state's accrual rate (typically 8.667 weeks per 10 years). Second, identify any leave loading — many awards provide a 17.5% leave loading on annual leave, and this should also be paid on termination. Third, determine your termination type (genuine redundancy, resignation, or other) and apply the appropriate tax rate. Fourth, remember to account for the Medicare levy (2%) and any HELP/HECS debt repayments that may apply. Fifth, check whether any tax-free component applies (genuine redundancy tax-free limit). For a precise calculation, use the ATO's withholding rate schedules (available at ato.gov.au) or ask your employer's payroll department for an estimate. You can also use a registered tax agent. Keep in mind that the amount withheld from your final pay is a withholding estimate — your actual tax liability is determined when you lodge your tax return.
ATO withholding schedules and lodging your tax return
The ATO publishes detailed withholding schedules that employers must follow when calculating tax on leave payouts. These schedules are found in the Tax table for unused leave payments on termination of employment (NAT 3351). Employers are legally required to use these schedules — they cannot simply apply your usual PAYG rate to the leave payout. When you lodge your tax return for the financial year in which you received the leave payout, the lump sum is included in your assessable income (subject to the special rules for long service leave accrued before 1993). If the amount withheld during the year exceeds your actual tax liability, you will receive a refund. This commonly happens when the withholding rate on the leave payout was higher than your effective marginal rate for the year. To ensure your tax return is accurate, check that your employer has correctly reported the leave payout on your income statement (formerly group certificate) — it should appear as a separate line item with the applicable tax withheld. If you have a complex situation (long service leave spanning multiple accrual periods, genuine redundancy with a large tax-free component), consider engaging a tax agent to ensure your return is correct.
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General information and estimates only — not legal, financial, or tax advice. Always verify with the Fair Work Ombudsman (13 13 94) or a qualified professional.
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