Excessive Annual Leave Pay out - Tax Help

dlangdale on 13/08/2020 - 09:23

Morning Oz-bargain Team,

I am going to be ending my employment at the end of October with my current long term employer and I am looking for some guidance on how to best work through my excessive Annual Leave balance and negating tax implications.

I have 400+ hours of A/L and 300+ hours of Long Service Leave currently.

This will be obviously paid out when my employment finishing and be subject to a higher taxing.

I have the ability to have my A/L to be paid out on a weekly basis over the coming weeks prior to my employment ending, would this method result in less tax being deducted?

Open to any insights as this is well out of my comfort zone and want to get maximum out of these payouts.

Thanks

Financial

Comments

  • nick484 on 13/08/2020 - 09:24
    +5

    Which tax bracket do you already fall into?

  • dust on 13/08/2020 - 09:26
    +1

    Will you be starting up a new job? If so, how does the salary compare?

  • djsweet on 13/08/2020 - 09:29
    +97

    It won't change the amount of tax you pay in the end. Although it may cause you to pay more tax up-front, you will get it back at tax time.

    • aligind4h0us3 on 15/08/2020 - 19:49
      -1

      ^

      This.

    • SeVeN11 on 16/08/2020 - 12:38
      +1

      yeah it's way too late to think about this now, its already the 2020-2021 Financial Year.
      You're not going to be able to defer your income the July 2021.
      If you don't want the income, take the leave instead of $

      You may want to consider maxing out your superannuation contribution (especially if you are close to retirement)
      it's pretty much-forced savings that gets taxed at 15% instead of your marginal tax rate… The disadvantage is you can't touch it till you get towards retirement.

      Just call your superannuation company, they usually have an advisor who can talk with you about your options for FREE.

  • resmansg on 13/08/2020 - 09:35
    +2

    If you don’t wanna pay too much tax up-front then have them paid every week from now.

    • justjack on 13/08/2020 - 09:42
      +8

      This is not correct OP is leaving in Oct 20 - any payments made from now until then will fall in the FY21 income tax year the same as if leave is paid a single lump sum.

      • k-rokfm on 13/08/2020 - 09:49
        +5

        Yes, but if he gets it in a lump sum then the majority of the amount paid will be paid at the highest tax bracket. Then they would get money back at the end of FY. Depending on OPs salary, getting it paid every fortnight would get him more money "upfront".

        Either way OP will end up paying the same amount of tax.

        • Laurana on 14/08/2020 - 07:39

          This is only true if he has an incompetent payroll department. You can work out the correct tax component of the lump sum and not have massive amount of tax taken out.

          • kiitos on 14/08/2020 - 09:03

            @Laurana: What would the correct tax be calculated over?

          • gromit on 14/08/2020 - 20:24
            +1

            @Laurana: And how will they do that without knowing what he will earn after he leaves? All a business can do is make a guess.

            • Laurana on 14/08/2020 - 20:41
              +2

              @gromit: They’re not making a guess. They’re calculating the correct amount by following the instructions set out by the ATO.

              How to tax his future earnings will be up to his future employer.

              @kiitos, I linked the ATO guide on how to calculate the correct about of tax below and so did another poster.

              • gromit on 14/08/2020 - 22:12
                -1

                @Laurana: Except of cause the link is wrong. That is how to calculate for termination.

                • Laurana on 15/08/2020 - 00:09
                  +3

                  @gromit: It’s the same calculation if the employee terminates the employment. If you look at the table in the link it notes: “normal termination (eg voluntary resignation)”. Termination in this sense isn’t referring to firing, but termination of the employment. Which can be for many reasons such as redundancy or voluntary resignation.

                  Here’s another link for you, same info but with clear example for employee leaving.

                  https://www.ato.gov.au/forms/withholding-from-unused-leave-p…

      • resmansg on 13/08/2020 - 10:04
        +4

        I meant the amount of tax he paid up-front, not in the end of the FY.

        • sabracad on 14/08/2020 - 12:09

          Yeah but as Laurana said that's not correct.

          If the payroll department is competent they will either have software that calculates this correctly for them or if not they should refer to the ATO. The tax should be calculated using the marginal rates pro-rated over the number of pay periods in the year.

          Even if the employer agreed to keep paying the employee on a weekly basis and continued all the way until 30 June 2021 the up front tax would still be higher as the calculation wouldn't be pro-rated over the full year. This excess tax wouldn't be recovered until lodgement.

          • resmansg on 14/08/2020 - 13:25
            -3

            @sabracad: Do you think they even care for this as the OP is leaving the company anyway, they won't care how much tax OP is paying up-front as he can claim in the end anyway.

            • Laurana on 14/08/2020 - 20:44
              +1

              @resmansg: They should care because it is still their responsibility to pay employees correctly and withhold the correct amount.

              The rules are pretty black and white and not subject to the employer’s feelings about it.

              • AFOS on 15/08/2020 - 15:41
                -1

                @Laurana: Nobody is paying manually nowadays. So whatever the system spits out OP will be paid. In most cases it will be correct. If not, OP can always contact them and they will fix it. It has nothing to do with competency of payroll department. Nobody checks each individual employee's payout against tax tables.

                There is one consideration though that was not mentioned: Medicare levy surcharge. There is high chance that getting AL + LSL + salaries in one year will push OP to the bracket where they will have to pay it (unless they are already paying it). This may be not pleasant surprise at the end of the year

            • sabracad on 15/08/2020 - 12:39

              @resmansg: The ATO directions are clear but also if it prevents the employee coming back to challenge the calculation and means no STP/BAS/Cash adjustments it's a win for everyone.

  • JimmyF on 13/08/2020 - 09:43
    +1

    I have the ability to have my A/L to be paid out on a weekly basis over the coming weeks prior to my employment ending, would this method result in less tax being deducted?

    Having it paid out in a lump sum will push you into a higher bracket for THAT pay period only and you will be taxed as such.

    BUT tax paid is balanced up at the end of the year when you do your tax return. So any 'extra' tax you may have paid, will be refunded at the end of the year.

    For example you earnt $100k total for the year, you pay tax equal to $100k. If you have paid more or less tax than this, its refunded (or you get a tax bill).

    If you need more cash now, then get it paid out weekly, if you don't need the cash now, get it in a lump sum, and then tax times comes, you'll get a nice refund from the tax man!

    • sabracad on 14/08/2020 - 12:14
      -1

      Having it paid out in a lump sum will push you into a higher bracket for THAT pay period only and you will be taxed as such.

      if you don't need the cash now, get it in a lump sum, and then tax times comes, you'll get a nice refund from the tax man!

      Both of these comments are wrong provided the payroll team understands the ATO guidance regarding tax on terminations.

      • JimmyF on 14/08/2020 - 14:13
        -6

        Both of these comments are wrong provided the payroll team understands the ATO guidance regarding tax on terminations.

        The OP isn't being terminated they are leaving on their own accord, so termination lump sum payment rules don't apply. Get your facts right before you start claiming people are wrong.

        • iand on 15/08/2020 - 11:59
          +3

          Whether you resign or are fired in this context your employment is being terminated
          I would suggest you take your own advice and "Get your facts right before you start claiming people are wrong."

          • sabracad on 15/08/2020 - 12:47
            -1

            @iand: JimmyF is wrong but in terms of termination the concessional rates of tax only apply to leave payments in the case of a genuine redundancy. Unless the OP has omitted a number of key facts this would seem highly difficult to argue.

        • sabracad on 15/08/2020 - 12:27
          +1

          To clarify I wasn't making any reference to the incorrect comments regarding concessional rates of tax related to redundancy.

          Having it paid out in a lump sum will push you into a higher bracket for THAT pay period only and you will be taxed as such.

          If the payroll team follow ATO guidance the tax calculation is spread over the full financial year. Per your comment any termination could potentially be incorrectly pushed fully onto the top marginal rate for one pay period.

          if you don't need the cash now, get it in a lump sum, and then tax times comes, you'll get a nice refund from the tax man!

          Because the tax calculation is pro-rated over the full financial year and not one pay period, in theory any tax adjustment at year end would be minimal.

      • brad1-8tsi on 14/08/2020 - 16:11
        +2

        It isn't an ETP unless you can get the company to pull a shonky and state it is. Good luck with that.

  • Rescue 26 on 13/08/2020 - 09:44
    +9

    Are you sure you are entitled to an LSL payout? Depending on your contract and your state's LSL legislation you would need to have worked for a minimum of 10 years for a full 13 week payout, or possibly 7 years (depends on state) for a pro rata payout (about 9 weeks leave or pay equivalent). Anything less than 7 years and you're not entitled to anything AFAIK.

    • [Deactivated] on 14/08/2020 - 07:12
      -7

      If he accrues LSL ie has a displayable balance, he’s entitled to a payout. Legally you don’t accrue LSL until eligible.

      • psychojimmy on 15/08/2020 - 23:21
        +1

        Incorrect. Some employers allow you to take it pro-rata from an earlier date, but won’t pay it out until you hit the required threshold of x years of service.

    • brad1-8tsi on 14/08/2020 - 16:13
      +1

      It depends on your EBA / leave terms.

      NSW state government pays out after 7 years (it may be 5 now) plus if you work a few years, leave come back work a few years and come back it accrues. It's a joke.

  • Dodgy Bob on 13/08/2020 - 09:46
    +16

    Rather than ending your employment and having it paid out, you're better off taking the leave and then ending your employment once your leave runs out. Not only will this reduce the tax paid, but you will also accrue leave whilst on leave, thus increasing your overall benefit.

    • conan2000 on 13/08/2020 - 10:24
      +6

      This makes sense for paying less tax, but not for having more money. If OP works until October they get their full salary for working + their leave accruals. If they take the leave now then they get no payout at the end, essentially losing 700 hours of extra income.

    • RandomNinja on 13/08/2020 - 11:21
      -1

      If the employer allows you to extend your end date with A/L then yes there's a benefit. I'd say most employers wouldn't agree to this as there's no upside for them.

      • dasher86 on 13/08/2020 - 13:10
        -2

        There's a slight upside to them in terms of the oncosts they have to pay when they payout annual leave, of which they wouldn't have to pay if you were to take it.

      • conan2000 on 13/08/2020 - 13:39
        +3

        Ah I see where you're coming from. There's definitely no upside for the employer, and in fact it would cost the employer more. They don't need to pay superannuation on payouts of accrued leave balances, but they will pay this if you actually take the leave while still employed.

      • ol mate on 13/08/2020 - 18:58
        +2

        Only upside is cashflow - paying over 18 weeks instead of in a lump sum.

        • AFOS on 15/08/2020 - 15:50

          Another upside is that public holidays get paid as a normal working day even if employee is on leave.

          So, if OP plays their cards right they can get: super on annual leave (not payable on termination but payable whilst being on leave) + annual leave & long service leave accrual + any public holidays paid whilst on leave.

          The problem is that it will unlikely be approved by employer. And this is where the competency of payroll department comes (not scrutinizing each individual payout against tax tables as some suggested).

    • JimmyF on 13/08/2020 - 14:41

      you're better off taking the leave and then ending your employment once your leave runs out.

      Depends, if the OP is going to start another job straight away, it will make no difference and they may end up with a tax bill, as both jobs will be claiming the 'tax free' component.

    • andrek on 14/08/2020 - 07:12
      +4

      You will actually end up at least 9.5% better if in this case. Since you are officially still employed while on leave, you will also be paid super. If you cash out A/L and LS/L you won't get super paid for that part of your income.

      • sabracad on 14/08/2020 - 12:25
        -6

        This isn't correct. He would also be earning super if he weren't on leave.

        • Donaldhump on 14/08/2020 - 20:35
          +1

          Paid out al gets no sg paid, thus the point is to use the leave then resign 4 weeks before the end date.

          If you have no plans to work after oct why not use it.

          • sabracad on 15/08/2020 - 12:33
            -1

            @Donaldhump: I didn't say lump sum payments accrued SG.

            The scenario being compared was working up to ceasing employment vs taking leave up to ceasing employment. Both result in exactly the same SG and exactly the same overall leave accrual - with this then netted down in the second scenario due to leave taken.

            So while you might be better off in that you've had the benefit of taking some leave you're not 9.5% better off financially.

            • Donaldhump on 15/08/2020 - 14:01

              @sabracad: Right but that wasn’t what was being strategised. The date the op wants to stop working is October, so instead go on holiday in October then resign dec or so when it expires. F… it go back in for 4 weeks resign first day back nand get the Xmas public holidays as well.

              • AFOS on 15/08/2020 - 15:52

                @Donaldhump: Exactly!

              • andrek on 17/08/2020 - 09:03
                +1

                @Donaldhump:

                go back in for 4 weeks resign first day back nand get the Xmas public holidays as well

                Can't get more OzBargain than that!

    • sabracad on 14/08/2020 - 12:24

      This only makes sense financially if the OP finds and starts working another job while on leave.

      If he continues working his leave entitlements also accrue in the same fashion as you're suggesting.

      This does not reduce the tax paid.

    • Donaldhump on 14/08/2020 - 20:32
      -1

      And also get the super garuntee

    • geoffs87 on 15/08/2020 - 06:31

      Less tax, but also less cash at the end of the year.

      In your example, time on leave is earning a dollar, paying 33c in tax.

      If OP goes back to work, they will effectively be earning $2 and only paying 37c in tax, for the equivalent time that their leave is being paid out (~92 days).

      Every day of the week I’d prefer to earn more, even if it means paying proportionately more tax, than earning less to pay less tax.

    • peterw1 on 15/08/2020 - 10:31

      dodgy bob says it best, look you have 700+hrs of leave, assuming a 40hr week, that's 17.5 weeks leave. When on leave you will accumulate another 17.5hrs of leave (assuming 1hr LSL accumulation/week) ie almost another 1/2 week of paid leave. My suggestion take the leave and resign at the end. Start the new job when you want but preferably when the leave ends and ignore the tax. Australia wants you to take leave, have a break and wants your tax. Do both. Ask not what…..

  • Gotchas on 13/08/2020 - 09:52
    +1

    You can go into a lower tax bracket by donating to well run charities

    • John Kimble on 13/08/2020 - 09:59
      +1

      Does it not lower if donating to poorly run charities?

      How does a noob like me determine the running performance of a charity?

      • jacross on 14/08/2020 - 07:24
        +2

        Very tenuous link to the topic but on the subject of charity rating, allow me to plug GiveWell.

    • dasher86 on 13/08/2020 - 09:59
      +4

      doesn't need to be 'well run' just need to be DGR

    • GoldenDragon888 on 13/08/2020 - 12:44
      +1

      Even better to donate to your own poorly run DGR.

    • andrek on 14/08/2020 - 07:13
      +4

      You can also "donate" to you super, up to 25k total a year.

      • John Kimble on 14/08/2020 - 07:35
        +1

        Usually also poorly run.

        • Vote for Pedro on 14/08/2020 - 17:34
          -1

          Smsf and retail this is probably true, industry Super no

    • johnno07 on 16/08/2020 - 00:27
      +1

      You can go into a lower tax bracket by donating to well run charities

      I have nothing against donating to charities (particularly well run ones) but doing it for the sole purpose of "going into a lower tax bracket" doesn't make any sense. Sure, you'll pay less tax, but only because you've literally given your taxable income away. Whenever people talk like this it sounds like they think their entire income is taxed at the same rate.

  • Porker on 13/08/2020 - 10:09
    +1

    My organisation just has the employee take leave until the leave balances are exhausted. So they're last day physically in the office is 'X' months before their last day with the organisation.

  • theHMASfriendship on 13/08/2020 - 10:27
    +9

    Take half a year off and push out resignation date

  • donbot on 13/08/2020 - 10:33
    +17

    Superannuation is not paid on AL/LSL payout.

    Perhaps worthwhile drip feeding it out before termination.

    • twodollah on 13/08/2020 - 13:14

      I had no idea this was the case. Good info to know. My work pays out superannuation for AL payouts so maybe it must be due to an additional benefit.

      • conan2000 on 14/08/2020 - 22:49
        +1

        There's nothing stopping an employer from paying it out, they just aren't actually required to on payouts when leaving.

    • RandomNinja on 13/08/2020 - 14:09

      Same, didn't know this either!

    • drfuzzy on 14/08/2020 - 17:43
      +1

      Also loadings are not paid out - eg. leave loadings if you are entitled to these.

      • donbot on 14/08/2020 - 17:48
        +2

        uhh… not sure about that. if loading is payable during employment, its payable on termination.

    • noz on 15/08/2020 - 09:48

      This is an excellent point. I myself had a massive amount of AL/LSL owing which I was paid out on when I quit the company. I subsequently found out that I missed out on the super on this.

    • dufflover on 16/08/2020 - 15:46

      Didn't know this either. So really, you "lose" money if you take it all out early and you're at a company that doesn't do that (and post COVID, I'm sure many will rethink being so generous!)

  • GG57 on 13/08/2020 - 10:43
    +1

    My understanding (happy to be corrected) is that you will be taxed at 32% for AL and LSL accrual payouts:
    https://www.ato.gov.au/Rates/Schedule-7---Tax-table-for-unus…

    Is that a higher tax rate?

    Regardless, you still have a win in that your salary has probably increased so those accruals are worth more to you now in $ terms, than when they initially accrued.

    • shakman on 14/08/2020 - 09:13
      +3

      Having Annual leave and Long Service Leave taxed at 32% , only works if the Op is departing because of genuine redundancy, invalidity or early retirement scheme.

      I think the Op is leaving for a new job.

  • Amaris on 13/08/2020 - 12:10
    +2

    Any chance you could delay you termination date and get the accrued leave paid as annual leave? So you will not be actually be working but use up the annual leave to delay the termination date.
    Actually taking annual leave will make the employer pay you Super whereas getting it paid out will not. Please correct me if wrong.

  • Seraphin7 on 13/08/2020 - 12:20
    +1

    The following is on the basis that your employment is terminating as a result of resignation. Different rules apply in the case of redundancy.

    One way or another, it all squares up through your tax return.

    This is an oversimplification, but you'll get the point. For the purposes of this illustration I'm assuming you are earning no other income.

    If you get all the leave paid out in one hit, you'll be taxed at that point as if you'd earned all that money in the current pay period (i.e. weekly, fortnightly, monthly, whatever). Let's say the total payout is $50k. You will then be taxed as if you'd earned $50k for the period, let's say one week. That means it will look like you earned $50k that week and you'll be taxed accordingly … basically half will go in tax.

    If you get paid out weekly, over say 10 weeks, you'll be taxed as if that was your normal salary and therefore tax will be deducted at a rate equivalent to $5k a week or $250k a year. Less tax will go out than in the first instance, although at $250k you'll still be paying around 35% tax.

    At the end of the year, you will then simply report your income as $50k. The tax office works out the amount of tax that you will need to pay on that and because of the tax already taken out per the above examples, you'll be in line for a large tax refund (again, making the simplifying assumption of no other income).

    Once you then layer back on all your other activities/income, the amount of tax you are up for at the end of the year will be identical in any scenario … if you earn $x, you need to pay $x * y% for the year. The only difference taking the cash as a lump sum vs. spread out over a number of weeks is the amount that gets deducted when it is paid to you. It make no difference to the amount of tax you pay overall at the end of the year (and therefore the size of your tax refund, or payment of you have significant other untaxed income).

    • Laurana on 14/08/2020 - 07:54
      +1

      This is true and how accounting systems treat it, but there are manual ways to adjust the tax taken out and you should be able to speak to your payroll department/person about it.

      https://www.ato.gov.au/Forms/Withholding-from-unused-leave-p…

      • shakman on 14/08/2020 - 09:16

        I think the Op's payroll department and their payroll software should tax it in the way the ATO advises in your link and shouldn't be "manually" adjusting the amount of tax because the Op would like like it taxed at a different rate based on advice they got from Oz Bargain..

        • Laurana on 14/08/2020 - 10:58

          You misunderstood what I said.

          The Accounting software calculates the tax in one hit, and the payroll department should tax it in the way the ATO advises by manually adjusting the tax taken out on the accounting software. I wasn't suggesting that the payroll person manually adjust it to withdraw whatever tax the OP would like, but to adjust it so that it equals the amount that should be withdrawn per the ATO advise.

  • bigticket on 13/08/2020 - 12:58
    +3

    If you are retiring there is way of reducing tax.

    Delay your retirement so that LSL is taken this financial year and the annual leave taken in the next financial year.
    If your employer is on board, simply take leave without pay and LSL to "fill" out this year. Then AL next year. This will result in most of the AL being tax free due to 18,200 tax threshold and LMITO/LITO.

  • GangGang on 13/08/2020 - 13:22
    -1

    Do you recieve long service loading if you leave without using it? It may be worthwhile to use it and recieve the loading.

    • Laurana on 14/08/2020 - 07:42
      +1

      Yes you do if you’ve worked in the company for 5-10 years (depending on the state and your reason for resigning).

    • shakman on 14/08/2020 - 09:17

      as a FYI, 17.5% Leave Loading is only on Annual Leave, not on Long Service Leave….

      • Laurana on 14/08/2020 - 10:53

        Sorry, it was too early in the morning and I skipped over the 'loading' part of the question :P.

        Aschachter is correct. Leave loading only applied on annual leave (if it's a part of your award/contract) and it is payable on termination.

      • GangGang on 14/08/2020 - 14:44

        You're correct. I got confused with annual & long service.

  • RandomNinja on 13/08/2020 - 14:15
    +1

    I have the ability to have my A/L to be paid out on a weekly basis over the coming weeks prior to my employment ending

    Is this on top of your regular salary? If so, seems good as you'll get super paid on it (as I just discovered in this thread!)

  • BigBirdy on 14/08/2020 - 07:46
    +5

    Top up your super. Concessional contributions are taxed at 15%, which is almost certainly a lower tax rate than your marginal rate

    • scanuck on 14/08/2020 - 21:55
      -3

      Isn’t this an additional 15% - ie you would have already paid the income tax

  • shakman on 14/08/2020 - 09:09
    +1

    Unfortunately the answers from one of the other other esteemed people that have tried to help is incorrect, 32% Tax on Unused Annual Leave and Long Service Leave only Works if a person leaves because of genuine redundancy, invalidity or early retirement scheme, otherwise it is at the Ops Marginal Rates.

    Even if the Op takes it over in their pay over the period to when they resign instead of a lump sum, if the payroll department can work it out correctly, as the per the link https://www.ato.gov.au/Rates/Schedule-7---Tax-table-for-unus… it will be taxed at Marginal Rates.

    Also any extra tax paid when you leave will be refunded at tax time.

    The only question I will ask, is that are you planning to take some of this leave before you finish up or is the employer letting you cash out your leave weekly before you go?

  • Candour on 14/08/2020 - 10:01
    +1

    could you take your leave at half pay? may stretch out over more than 1 year? and defer your termination date?

    • worrierwan on 14/08/2020 - 20:00

      If your employer does this, it would be even better for the tax you pay upfront. Plus you'll accrue super and AL, even when on leave.

  • HeWhoKnows on 14/08/2020 - 15:16
    -1

    If some or all of it is an ETP (Eligible Termination Payment) then have it paid into your Superannuation

  • drfuzzy on 14/08/2020 - 17:27

    Best financially is to use your excessive leave - put in for a long block of holidays and use it up prior to resigning. Start the new job during the leave if necessary.

    The reason is that employers are not required to pay you compulsory superannuation on your accrued leave if they pay it out. You also lose any loadings you might otherwise be entitled to on the unused leave hours. This means you are at least 9.5% worse off, and probably more than that with loadings added.

    • Donaldhump on 14/08/2020 - 20:39
      +1

      And then get sacked for starting new job while still employed.

  • baldur on 14/08/2020 - 19:04

    You will get a bigger amount of tax return. It's not like you are losing money.

  • superdarkhumour on 14/08/2020 - 19:55

    Thank you!

  • Donaldhump on 14/08/2020 - 20:39
    +1

    Have you ever taken a holiday?

    • danyool on 14/08/2020 - 21:16

      Haha!

  • bmerigan on 14/08/2020 - 21:54
    +1

    Tax is determined on your yearly income so whether you get paid all at once or weekly, the tax will end up the same once you do your next tax return.

  • ribze1 on 14/08/2020 - 22:30
    +1

    How TF did you accrue 400 hours of AL? That's 52 days; essentially means you did not take one day off work in 2.5+ years, even over Xmas.

    • katykat on 14/08/2020 - 22:45

      This was my first thought. Wish I had that much annual leave, I basically drain mine every year!

      Some people are like that though. I used to work for a Judicial Officer in a very high position who retired after 35 years in the Courts. He took a lot of leave in his last few years to try to drain some of his leave entitlements, but even doing that he still retired with almost a year of annual leave and about the same in sick leave.

      He said it was because he never really got sick and that he worked non-stop for years and years when he was younger. It was just what was expected.

    • [Deactivated] on 14/08/2020 - 23:17

      Accruing that much over 7+ years doesn't seem that unreasonable to me?

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