Cashing Out Annual Leave or Taking It Before Retirement: What Employees Need to Know
Your annual leave balance is valuable. It represents paid time away from work and, in some circumstances, money you may be able to receive without taking leave.
If your balance is growing, you may wonder whether you can cash some of it out. If retirement is approaching, you might also be deciding whether to take the leave before finishing work or receive it in your final pay.
The amount shown on your payslip is only part of the story. Your decision can affect your superannuation, tax, Centrelink position and the amount of leave you continue to accrue.
Understanding the rules can help you find the golden balance between time off and money in your pocket.
Key Takeaways
- You can only cash out annual leave if your award or enterprise agreement permits it.
- Under most modern awards, you must retain at least four weeks of leave.
- You generally cannot cash out more than two weeks in any 12-month period.
- Your employer cannot force or pressure you to cash out leave.
- Super generally applies when leave is taken or cashed out while you remain employed.
- Super is generally not payable on unused leave paid when employment ends.
- Cashing out leave, taking leave and receiving a termination payout can have different tax consequences.
- Retirement and Centrelink implications should be checked before making a decision.
What does cashing out annual leave mean?
Cashing out annual leave means receiving payment for some of your accrued leave instead of taking the corresponding time away from work.
This is different from receiving unused leave in your final pay.
When you cash out leave, you remain employed. When unused annual leave is paid because you retire, resign or otherwise leave your job, it is a termination payment.
That distinction matters because the tax, superannuation and payroll treatment can be different.
Can you cash out annual leave?
Cashing out annual leave is not an automatic entitlement.
You can only cash out leave if your modern award or enterprise agreement permits it. Award-free and agreement-free employees may also enter into a cash-out agreement, provided the National Employment Standards are satisfied.
Under most modern awards:
- you must retain at least four weeks of annual leave after the cash-out;
- you cannot cash out more than two weeks in any 12-month period;
- you and your employer must make a separate written agreement each time;
- the agreement must record the amount of leave, the payment and the payment date;
- you must receive at least what you would have received if you had taken the leave; and
- the decision must be voluntary.
If you are under 18, most award provisions also require your parent or guardian to sign the agreement.
The Fair Work Ombudsman states:
“An employer can’t force or pressure an employee to cash out annual leave.”
Your employer does not have to agree to every request. Both parties must agree and meet the applicable award or enterprise agreement requirements.
Do you need an excessive leave balance?
Not necessarily.
Cashing out annual leave and managing an excessive leave balance are different processes.
Under many awards, annual leave is considered excessive when an employee has more than eight weeks available, or more than ten weeks for certain shiftworkers. However, you do not always need an excessive balance before requesting a cash-out.
For example, if you have six weeks of leave, your award may allow you to cash out two weeks and retain the required four-week balance.
Will you receive annual leave loading?
If you cash out annual leave, you must generally receive at least the amount you would have received by taking the leave.
This means annual leave loading may need to be included if it would have applied had you taken the leave.
Loading is not payable to every employee. Your entitlement depends on your award, enterprise agreement or employment contract.
Is super paid when you cash out annual leave?
The answer depends on whether you remain employed.
Super generally applies when you:
- take paid annual leave; or
- cash out annual leave while continuing your employment.
However, super is generally not payable on unused annual leave paid when your employment ends.
| Option | Are you still employed? | General super treatment |
|---|---|---|
| Take annual leave | Yes | Super generally applies |
| Cash out leave during employment | Yes | Super generally applies |
| Receive unused leave in your final pay | No | Super generally does not apply |
The ATO confirms that unused leave payments made when employment ends do not form part of ordinary time earnings or qualifying earnings for super guarantee purposes.
How is cashed-out annual leave taxed?
Cashed-out annual leave is taxable income.
If you remain employed, the ATO generally treats the cash-out as an additional payment. Your employer will usually calculate PAYG withholding using the current tax table for back payments, commissions, bonuses and similar payments.
The amount withheld is not necessarily your final tax liability.
Your final result depends on your total income, deductions, tax offsets, Medicare levy and other circumstances for the financial year. You may receive a refund or have additional tax to pay when your tax return is prepared.
What happens to unused annual leave when you leave your job?
When your employment ends, your employer must generally pay your accumulated unused annual leave.
This applies whether you:
- resign;
- retire;
- are dismissed; or
- are made redundant.
The payment should generally equal what you would have received if you had taken the leave during employment. This may include annual leave loading or another payment required by your award or enterprise agreement.
Unused annual leave is not automatically an employment termination payment or “Lump Sum A”.
The withholding and reporting treatment can depend on:
- why your employment ended;
- whether the termination involved genuine redundancy, invalidity or an approved early retirement scheme;
- when the leave accrued; and
- the tax rules applying in the year you receive it.
ATO Schedule 7 for unused leave paid on termination.
Should you take annual leave before retiring?
Taking annual leave before retirement can produce a different result from finishing work immediately and receiving a final payout.
Taking your leave before retirement may mean:
- you receive your normal leave pay;
- super generally continues to be paid;
- annual leave continues to accrue while you are on paid leave;
- you remain employed for longer;
- you receive valuable time away from active work; and
- your income may fall across two financial years, depending on timing.
Receiving unused leave in your final pay may mean:
- your employment ends sooner;
- you receive the leave value as a lump sum;
- super is generally not paid on the unused leave; and
- all or most of the payment may be received in one financial year.
Taking leave is not automatically better, and receiving a payout is not automatically more tax-effective. The best option depends on your income, retirement date, leave loading, super position and personal priorities.
Your employer must also approve when annual leave is taken. Retirement timing may therefore need to be discussed and agreed in advance.
Could spreading income over two financial years reduce tax?
Possibly, but it is not guaranteed.
If paid leave extends into a later financial year, some employment income may be received in that later year. This could produce a different tax result where your income varies significantly between years.
However, the outcome can also be affected by:
- other employment or investment income;
- capital gains;
- reportable super contributions;
- Medicare levy;
- tax offsets;
- study and training loan repayments; and
- the date on which amounts are paid.
The potential result should be calculated using your complete circumstances rather than relying only on your marginal tax rate.
What about personal super contributions?
People aged 67 to 74 may need to satisfy the work test to claim a tax deduction for personal super contributions.
The work test does not generally apply to every type of voluntary contribution. Age restrictions, contribution caps and total super balance rules must also be considered.
The work-test exemption has several conditions, generally including:
- satisfying the work test in the previous financial year;
- having a total super balance below $300,000 at the previous 30 June; and
- not having used the exemption previously.
Do not assume that being on paid leave automatically satisfies every requirement. Obtain advice before contributing or claiming a deduction.
Could your leave payment affect Centrelink?
Yes. The treatment depends on whether your employment continues and which Centrelink payment you receive.
Leave cashed out while employment continues is generally treated as employment income.
Where an Age Pension recipient retires and receives unused leave, the termination payment is generally not treated as continuing employment income. However, money retained in a bank account or investment may become an assessable asset and may be subject to deeming.
An income maintenance period may apply to other payments, including:
- JobSeeker Payment;
- Parenting Payment;
- Youth Allowance;
- Austudy;
- Disability Support Pension; and
- Farm Household Allowance.
You must tell Services Australia about leave payments and lump sums.
Questions to ask before making your decision
Before cashing out leave or choosing a retirement date, ask:
- Does my award or enterprise agreement allow a cash-out?
- How much leave must remain afterward?
- Will annual leave loading be included?
- Will super be paid?
- How much PAYG withholding will apply?
- Would taking the leave allow further leave to accrue?
- Will the payment fall into this financial year or the next?
- Could it affect my Centrelink payment?
- Do I need tax or licensed financial advice?
Find the golden balance between time and money
Annual leave has both financial and personal value. Cashing it out may provide additional money now, while taking the leave can provide time away from work, continued super contributions and further leave accrual.
If retirement is approaching, even a small timing difference may affect your tax and superannuation outcome.
DJ Grigg Financial can help you understand the tax treatment of your annual leave payment and compare the tax consequences of different timing options. Where personal superannuation, investment or retirement-income advice is required, we can help identify when you should speak with a suitably licensed financial adviser.
Contact DJ Grigg Financial before making your decision so you can move forward with clarity and confidence.
Are you an employer managing staff leave balances? Read our employer guide to cashing out leave, excessive balances and shutdowns:
This information is general and does not replace advice based on your award, enterprise agreement or personal circumstances.