Accrued Leave at Retirement: Take a Holiday or Take the Payment?
If retirement is approaching and you’ve built up a large balance of accrued leave, you may face an important decision: take the leave as paid time off or receive a lump‑sum payout when you retire. Each option carries different tax, superannuation and Age Pension implications, so it pays to plan ahead.
Superannuation Implications
When you take paid leave before retiring, your employer continues to pay superannuation guarantee contributions on your holiday pay. In contrast, employers do not pay super on lump‑sum leave payments made when you retire.
By taking your leave as time off before retirement, you can boost your super balance through additional employer contributions. This approach can provide a meaningful increase to your retirement savings.
Taking leave may also extend the period during which you can make personal super contributions.
If you are aged 67 to 75 and want to claim a tax deduction for personal super contributions, you must meet the work test. You meet the work test if you work at least 40 hours within a consecutive 30‑day period during the financial year in which you make the contribution. If you do not meet this requirement, you cannot claim a tax deduction for your personal super contributions.
A once‑only work test exemption may also apply. If your total super balance is under $300,000, you can claim a deduction even if you do not meet the work test in the current year—provided you met it in the previous financial year and have not used the exemption before. This rule helps newly retired individuals extend their contribution window for one extra year.
By taking accrued leave before retirement and ensuring you meet the 40‑hour requirement in the following financial year, you may extend your ability to contribute to super and claim a deduction.
Tax Considerations
Employers tax lump‑sum accrued leave payments in the year you receive them. If you defer retirement by taking leave into a new financial year, you may benefit from greater tax flexibility.
In some cases, deferring retirement can increase the concessional tax treatment available for employment termination payments. You may also fall into a lower marginal tax bracket in the new financial year if you no longer receive salary income after retiring.
Age Pension Considerations
If you plan to claim the Age Pension, the way you receive your accrued leave can affect your assessment.
A lump‑sum payment received on retirement does not count as income for Centrelink purposes, but it may count as an assessable asset, depending on how you invest or hold the money. For some people, this lump sum could push their assets above the Age Pension threshold.
In contrast, holiday pay does not count when Centrelink assesses your Age Pension eligibility after you retire.
Take Leave or Take the Lump Sum?
Taking accrued leave before retirement can:
- Increase employer super contributions
- Extend your eligibility to make personal super contributions
- Provide greater tax planning flexibility
Taking a lump‑sum payment at retirement may:
- Allow earlier access to social security
- Offer simpler administration
- Deliver favourable tax treatment in some situations
Plan Ahead Before You Retire
There is no one‑size‑fits‑all answer. The best option depends on your income, super balance, tax position and retirement timing. Speaking with your tax adviser well before retirement can help you make the most of your accrued leave and avoid costly mistakes.
Careful planning now can significantly improve your financial position in retirement.
Important: Clients should not act solely on the basis of the material contained here. Items herein are general comments only and do not constitute or convey advice per se. Also, changes in legislation may occur quickly. We, therefore, recommend that our formal advice be sought before acting in any of the areas.
