Annual Leave Payout in Australia: What You're Owed and How It's Taxed

What is an annual leave payout, and when do you get one?🔗

Under the National Employment Standards (NES), employees get four weeks of paid annual leave a year (five for some shift workers). When your employment ends, your employer must pay out all accrued but unused annual leave, no matter the reason: resignation, termination, redundancy or retirement.

There is no minimum service period. If you worked three months and accrued five days of leave, those five days must be paid out. One catch: unused sick leave (personal or carer's leave) is generally NOT paid out, more on that below.

How your annual leave payout is calculated🔗

The payout is based on your base rate of pay for the hours of leave you have accrued. It does not include overtime, penalties, allowances or bonuses. Annual leave loading (commonly 17.5 percent) is only included if your modern award or enterprise agreement provides for it, because the payout must match what you would have received had you taken the leave.

Whether you get $2,660 or $3,125.50 comes down entirely to your award. Do not assume loading applies, check first.

How annual leave payouts are taxed🔗

This is where people get a surprise on the final payslip. The tax treatment depends on why your employment ended.

• Resignation or non-genuine termination: taxed as a lump sum using the ATO's Schedule 7 withholding method. The withholding can look high in that final pay run, but it reconciles at tax time against your actual marginal rate, so you may get a refund.
• Genuine redundancy or approved early retirement: the unused annual leave can be taxed at a concessional flat rate of 32 percent (including the Medicare levy). For anyone on a marginal rate above that, it is a real saving. See our guide to redundancy pay for how the rest of a redundancy is treated.
• Cashed out while employed: no concession, taxed as ordinary income at normal PAYG withholding.

Cashing out annual leave while still employed🔗

You do not have to wait until you leave to access your leave balance, but the rules are strict. You can only cash out annual leave if:

• Your modern award or enterprise agreement permits it (not all do).
• You sign a separate written agreement each time (a standing blanket agreement is not valid).
• You keep at least 4 weeks of accrued annual leave after the cash-out.
• You are paid at least what you would have received by taking the leave.

Most awards cap cash-out at 2 weeks in any 12-month period, and your employer cannot force or pressure you to cash out leave (that is unlawful). Since cashed-out leave is taxed as normal income, there is no tax advantage over taking the leave, the benefit is cash in hand when you need it.

Payout vs taking the leave🔗

Should you take the leave before your last day, or receive a lump-sum payout? Taking the leave is paid as normal salary with normal withholding, and you stay employed during it (relevant for notice periods). A lump-sum payout uses Schedule 7 withholding that can look higher in that final pay run, though it reconciles at tax time, and you get the cash immediately.

Practical tip: if you have a large balance, taking some leave before your last day spreads the income across pay periods and can soften the withholding, especially if you are near a bracket threshold. Just check whether your notice period lets you.

What about long service leave and sick leave?🔗

Long service leave is a separate entitlement and is generally paid out on termination. The rules vary by state and territory, but most require 7 to 10 years of continuous service before it vests, with some states allowing a pro-rata payout earlier (for example on redundancy). Check your state's legislation.

Sick leave (personal or carer's leave) is the one that surprises people: under the NES it is generally NOT paid out when you leave. Some enterprise agreements include a payout clause, so it is worth checking yours, but do not count on it.

❓ Frequently asked questions🔗