Annual Leave Payout Tax Australia: What You Owe in 2026

Quick Answer

Annual leave paid out on termination is taxed at a flat 32% (plus Medicare levy) if the employee's marginal rate is higher, unless the leave was accrued before 18 August 1993, which gets a 5% tax offset. Unused leave paid out while the employee is still employed — such as a cash-out — is taxed at the employee's normal marginal rate. The ATO requires you to withhold correctly and report it through Single Touch Payroll.

How Annual Leave Payout Tax Works at Termination

When an employee's job ends — resignation, dismissal, redundancy, or end of contract — any unused annual leave must be paid out under the National Employment Standards (Fair Work Act 2009, s.90). This payout is taxable income. The question is at what rate.

The ATO treats annual leave paid out on termination differently from regular wages. Under the withholding rules in NAT 3539 (the ATO's tax table for unused leave on termination), you apply a flat withholding rate of 32% for leave that accrued after 17 August 1993, regardless of the employee's usual marginal rate — unless their normal marginal rate is lower, in which case you use that lower rate. Add the 2% Medicare levy on top for most employees and you're looking at 34% total in most cases.

For example, a casual employee earns $6,200 in unused annual leave at the end of a contract. Their normal income might push them into the 19% or 32.5% bracket, but the ATO's termination withholding rule means you withhold at 32% flat (plus Medicare levy at 2%), so $6,200 × 34% = $2,108 withheld. The employee reconciles this at tax time through their individual return.

Pre-18 August 1993 Leave: The 5% Tax Offset Rule

Very few employees today have annual leave accrued before 18 August 1993 — that's over 30 years ago. But if you have a long-tenured employee who started work before that date and never fully drew down their leave, part of their payout may attract concessional treatment.

Leave accrued before 18 August 1993 is still subject to the 32% withholding rate, but the employee is entitled to a 5% tax offset when they lodge their personal tax return. You as the employer don't reduce the withholding — you withhold the full 32% — but you must correctly classify the pre-1993 leave amount separately in the payment summary or STP finalisation so the ATO knows to apply the offset.

In practice, this means splitting the payout into two figures: the amount accrued before 18 August 1993 (reported as Lump Sum A Type S in STP), and the amount accrued after (also Lump Sum A but Type R). If your payroll software doesn't distinguish between these two dates, you'll need to manually calculate the split based on employment start date and accrual records.

Annual Leave Cash-Outs While Still Employed

Cashing out annual leave while the employee is still working is different from a termination payout. Under the Fair Work Act, most modern awards and enterprise agreements allow employees to cash out a portion of their accrued annual leave, provided specific conditions are met: the cash-out must be in writing, the employee must retain at least 4 weeks of annual leave after the cash-out, and it must be at the employee's genuine request (the employer cannot require it).

For tax purposes, a leave cash-out paid during ongoing employment is treated as ordinary wages — not a lump sum termination payment. That means you withhold at the employee's normal marginal rate using the standard ATO PAYG weekly or fortnightly tax tables. You add the cash-out amount to the employee's regular pay for that period and calculate withholding on the combined figure.

This is a common mistake: employers see a large leave payment and assume they should use the flat 32% termination rate. That's wrong for mid-employment cash-outs and will over-withhold tax from the employee. The ATO is clear on this in Tax Withheld Calculator guidance — only termination payments use the Schedule 7 withholding method.

How to Report Annual Leave Payouts Through STP

Single Touch Payroll (STP Phase 2) requires you to report termination payments in detail — not just as a gross payment. Annual leave paid at termination must be classified using the correct Lump Sum codes so the ATO pre-fills the employee's personal tax return correctly.

Lump Sum A covers unused annual leave and long service leave paid on termination. Within Lump Sum A, you designate the type: R for leave accrued after 17 August 1993 (normal concessional treatment), and S for leave accrued before 18 August 1993 (eligible for the 5% offset). Lump Sum B is for pre-1978 long service leave and is rarely used. If you're using Xero, MYOB, or SAB Account AI, these fields should be available in the termination pay screen — but you need to enter the correct dollar amounts against the right type.

You must report the termination through STP on or before the employee's last pay day. A final pay event that's late — even by one pay cycle — can trigger an ATO compliance flag. If you're also processing Payday Super obligations, remember that from 1 July 2026 superannuation must be paid on or before each payday, not quarterly. A termination pay processed after that date means super on any leave loading component is also due that same day.

Leave Loading and Superannuation on Annual Leave Payouts

Many awards include annual leave loading — typically 17.5% on top of the base annual leave rate. This is designed to compensate employees for not earning overtime or penalty rates during leave. At termination, leave loading is generally payable on unused annual leave if the applicable award or agreement provides for it. Check the specific award — the General Retail Industry Award, Building and Construction Award, and Clerks Award all have different leave loading provisions.

For superannuation purposes, the ATO's position is that annual leave paid at termination does not attract super, because it is classified as a termination payment rather than ordinary time earnings (OTE). However, this rule has a nuance: if the leave loading is paid during employment (as part of a cash-out), it does form part of OTE and super applies. If it's paid at termination, it generally does not. The ATO's OTE guide (NAT 74172) is the authoritative source here.

This distinction becomes financially significant with Payday Super from 1 July 2026. Under the new rules, super must be paid alongside each payday. For a leave cash-out processed after 1 July 2026, you'll need to calculate super on the cash-out amount and transfer it to the employee's super fund on the same day. Your payroll software must handle this automatically — manual quarterly super calculations won't work under the new system.

State Payroll Tax on Annual Leave Payouts

If your total Australian wages exceed your state's payroll tax threshold, annual leave payouts are subject to payroll tax. Each state and territory has its own threshold and rate — in NSW the threshold is $1.2 million (2025–26), Victoria is $900,000, Queensland is $1.3 million, and Western Australia is $1.1 million. The State Revenue Offices (SROs) treat annual leave paid on termination as taxable wages for payroll tax purposes.

Most sole traders and small businesses with one or two employees will sit well below these thresholds and payroll tax won't apply. But if you're a growing business approaching the threshold, or you're part of a group of related entities that aggregates wages, you need to factor termination leave payouts into your monthly payroll tax returns. A large payout — say, $30,000 in accumulated leave for a 10-year employee — can push a borderline business over the threshold for that month.

NSW, Victoria, and Queensland all allow monthly or annual payroll tax lodgement depending on your wage level. Check your state's SRO website for current thresholds and due dates. The ATO does not administer payroll tax — that is entirely a state obligation.

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Is annual leave payout taxed differently from normal wages?

Yes — annual leave paid out at termination uses a flat 32% withholding rate (plus 2% Medicare levy for most employees), regardless of the employee's marginal rate, unless their marginal rate is lower. Annual leave paid during employment as a cash-out is taxed at the employee's normal marginal rate using standard PAYG tables. The distinction matters because getting it wrong will either over-withhold or under-withhold tax.

Does super apply to annual leave payouts at termination?

Generally no — annual leave paid at termination is not ordinary time earnings (OTE), so the 11.5% super guarantee does not apply to it. However, if annual leave or leave loading is paid as a cash-out while the employee is still working, super does apply because that payment is OTE. Confirm the classification using the ATO's SGR 2009/2 ruling.

What is Lump Sum A on a payment summary or STP report?

Lump Sum A is the STP Phase 2 classification for unused annual leave and long service leave paid at termination. Type R covers leave accrued after 17 August 1993 and Type S covers pre-18 August 1993 leave, which qualifies for a 5% tax offset in the employee's personal return. You must report the correct dollar amount against each type so the ATO pre-fills the employee's tax return accurately.

Can an employer force an employee to cash out annual leave?

No — under the Fair Work Act, a cash-out of annual leave must be genuinely requested by the employee in writing, and the employer cannot require it as a condition of employment. After any cash-out, the employee must retain at least 4 weeks of accrued annual leave. Check the applicable modern award as some restrict or prohibit cash-outs entirely.

What happens to annual leave payout obligations under Payday Super from 1 July 2026?

From 1 July 2026, super must be paid on or before each payday — not quarterly. If you process a leave cash-out after that date and super applies (because it's an OTE payment during employment), you must pay the super to the employee's fund on the same day as the cash-out. Termination leave payouts generally don't attract super, so Payday Super doesn't change those obligations, but confirming your payroll software handles the new rules is critical before the deadline.

Related: Payslip Requirements Australia · Casual Employee Payroll Australia · Payday Super 2026 · Payroll Tax Australia 2026 · Single Touch Payroll Small Business Australia