The decision to either utilise annual leave or cash it in on retirement can have implications for your super, tax and social security.

Employees approaching retirement can have significant leave entitlements and may choose to take their leave as a lump sum on termination of employment or go on leave and terminate their employment when their leave has been exhausted.

Below we look at some of the super, tax and social security considerations for each option:

1.  Superannuation

Taking leave as a lump sum

Terminating employment and ceasing an employment arrangement is necessary to satisfy the retirement condition of release, meaning employees wanting full access to their super may need to wait until terminating their employment. In this case terminating employment and taking leave as a lump sum may be preferred to extending their employment by taking leave.

Paid leave

Leave taken while employed attracts employer Superannuation Guarantee contributions which is effectively a 10.5% before tax increase in remuneration. At the time of writing the SG rate is legislated to gradually increase to 12% from 1 July 2025.

2.  Taxation

Taking leave as a lump sum

Certain tax concessions apply to leave accrued before 18 August 1993 that is paid as a lump sum at retirement. For example:

• Annual leave accrued before 18 August 1993 is subject to a maximum tax rate of 32% (including Medicare Levy).
• Long service leave accrued between 16 August 1978 to 17 August 1993 is subject to a maximum tax rate of 32% (including Medicare Levy).
• Only 5% of long service leave accrued before 16 August 1978 is assessable at marginal tax rates.

Unused annual and long service leave accrued after 17 August 1993 is taxed at marginal rates.

Paid leave

Taking paid leave may allow an employee to split their income over financial years. Splitting income across financial years will allow an employee to utilise an additional tax-free threshold and lower tiered tax rates.

3. Social security

Taking leave as a lump sum

Leave payments received as a lump sum are not assessed against the income test when calculating Age Pension entitlements. Income tested Age Pensioners may receive more in Age Pension receiving leave entitlements as a lump sum

Paid leave

Unpaid leave entitlements are not asset tested. Whilst leave taken is income tested, the income assessment of leave income against the Age Pension may be reduced by the ‘Work Bonus’. Age Pensioners are automatically entitled to the ‘Work Bonus’ which exempts part of their employment income from the income test.

Conclusion

An employee deciding whether to take their leave or receive it as a lump sum on retirement should consider their personal circumstances when deciding on the preferred option. Speaking to an adviser and modelling the options can assist with making an informed decision to maximise benefits.

If you have any questions, please contact your Shadforth adviser.